Hard times for brokers has silver lining for business borrowers

Mortgage brokers are branching out into commercial finance in an attempt to boost flagging profit margins, presenting a new and potentially lower cost borrowing option for business owners.

Mortgage brokers are branching out into commercial finance in an attempt to boost flagging profit margins, presenting a new and potentially lower cost borrowing option for business owners.

The credit squeeze has hit the mortgage broking industry hard, with many banks either cutting commissions on their products or withdrawing them from the broker channel entirely.

In an attempt to hold up profit margins, brokers are cutting costs, considering options for consolidation and moving into new product categories – particularly commercial finance.

For business owners, many already being told by their bankers to make do with less credit, the trend could hold out the prospect of a new, more competitive way of choosing a finance provider.

Australian Finance Group, one of the country’s biggest mortgage brokers, is one firm moving to establish itself in the new category. General manager Mark Hewitt says AFG’s commercial finance broking business currently makes about 10% of the earnings it derives from mortgage broking, but that share is likely to grow significantly.

“It is already a substantial contributor, but it will only get bigger as banks and business borrowers become more comfortable with using the broker channel – it is probably three or for years behind residential mortgages in terms of its development,” Hewitt says.

He says commercial finance broking is targeted primarily at the SMB market, with business turning over less than $10 million most likely to find brokers most suitable.

The change could present a challenge to the traditional model of business borrowing, where a business owner would form a long-lasting relationship with their personal business banker.

“A lot of business owners have dealt with one bank their entire lives, because it’s easy. The broker channel offers a number of choices and alternatives, so hopefully that will provide some opportunities for business and sharpen up the banks as well.”

But businesses should think carefully before doing away with longstanding banking relationships, Steven Anderson, head of research with independent finance website Infochoice, says.

“Some people want the relationship and as a result they may not find brokers attractive. But for those looking for a better range of options or who aren’t happy where they are, it could be a good option – it’s a bit like holding a reverse tender for your borrowing business,” Anderson says.

In addition to the movement on service, the tougher business environment could also see some new faces arrive – and others disappear – in the broking sector.

Listed mortgage broker Mortgage Choice has rejected a takeover offer from Count Financial, which valued the broker at $124 million.

Count has grabbed a 4.9% stake in Mortgage Choice as a strategic investment and had approached the company’s board about a full takeover at $1.05 a share (Mortgage Choice is now trading at $1.01). “After careful consideration, Mortgage Choice’s board reached the conclusion that Count’s proposal did not properly recognise the value of the business and was not in the best interests of Mortgage Choice shareholders,” Mortgage Choice chairman Peter Ritchie said in a statement.

Count executive chairman Barry Lambert told The Australian Financial Review that Count was unlikely to increase its offer as it had already had feedback from investors saying the mortgage sector is a “no-growth business”. But Lambert believes there would be “significant synergies” in combining the two companies.

Australian Finance Group is also looking to snap up some bargains in the industry. After cutting 40 staff earlier this year, the company is now in talks that could result in several small to medium sized firms coming under its umbrella.

“We will definitely see fewer, bigger operators and fewer individual operators in the period ahead. There are no 15,000 individual brokers in the sector, we are likely to see that reduce to 10,000 over the next few years,” AFG’s Hewitt says.

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