How to protect your practice in a rising Interest Rates environment.
On the 3rd of May 2022 the RBA finally increased the cash rate by 25 basis points to 0.35%. Let’s get a little perspective here – Interest Rates in Australia averaged 3.89 percent from 1990 until 2022, reaching an all-time high of 17.50 percent in January of 1990 and a record low of 0.10 percent in November of 2020.
This was the first rate hike since November 2010. I am not a betting man, but an educated guess tells me this is just the beginning. We can expect many more interest rate increases over the next 12-24 months as the Government tries to get on top of inflation.
The official inflation rate is 5.1% but anyone who buys food, houses, cars or petrol (i.e. everyone) knows the real inflation rate is much higher.
In an inflationary environment the cost of living rises way faster than wages meaning the money you have simply buys you less and sadly many people can’t afford the basics of life like food and shelter. Something must be done to slow down inflation. So, interest rates look set to rise.
What can you do in the face of rising interest rates to distinguish yourself?
Have an informed view – clients, particularly older clients, or investors relying on income, are going to be concerned. This is going to be a front-of-mind topic. Many will call you as their trusted advisor. After all, you deal with money don’t you? Therefore, they will look to you for insight and guidance (note, not that naughty word “advice”, but rather guidance and reassurance). Take time to read and gather some insights that resonated with you which you can share. Very few of my readers are economists – and even economists get it wrong more often than not! The important thing is to have a position and long after that is forgotten, you will be remembered for your considered approach and understanding manner.
Mortgages and loans are likely to get more expensive. – so, if you are a finance broker, refinancing existing loans to save customers an easy 1% will no longer be part of the playbook. But, locking a variable exposure to fixed at the right time may be a smart and very defensive play, or even a part into different duration fixed products can cushion the blow. Start to scour the market for lenders who offer fixed rate offerings that may not have moved. Our rates have not yet, but they probably will from July when the full impact of borrowing costs are passed on by the primary funders, so you may even be able to move quickly in some cases.
If you are a planner, or work with a planner or accountant, take stock of how much interest rate cover your client has. It may be that they are ahead on payments and have plenty of headroom, and simply quantifying this will give the priceless reassurance that is required that they can ride this through a series of increases.
What will it mean for your practice, brokerage or business? Deal flow will likely slow and you will need to accelerate new client prospecting because existing clients may be locked-in or only refinanced in the past couple of years. If property prices stagnate or possibly reduce, then the average size of loans may shrink and commensurately so will your commissions and fees if you have assets under management. So, time to start tightening the belt. The banquet table is not as plentiful, and the feeding frenzy is going to ease up.
But it’s not all doom and gloom.
As in all areas of life, the cream will rise to the top and the advisors and brokers who are smart and committed to adapting to rising interest rates will do well.
If you’re looking to profit from rising interest rates, here’s what you can do:
Early movers will get a jump on the rest and increase their volume over the next 6-12 months meaning they’ll make up for lower refinancing volume down the track. Plus, you’ll build loyalty with your clients meaning they’ll stick around for longer.
Acquire more new customers than ever before. Right now, interest rates are on everyone’s mind and clients are shopping around. This is the perfect time to increase your marketing. You don’t only need to grow “organically”. Some will see the change in monetary policy as the time to call it quits and having ridden the downward cycle, they will dismount from their ponies and sell. Here could be that golden opportunity to make sensible offers to acquire books and with them more new customers than ever before.
Invest in your own future now – you may be able to borrow money today while it’s still relatively cheap and particularly before the SME backed Government loans are set to expire on 30 June. The specialist fixed rate loans we offer are still available for brokers, advisors and planners looking to purchase trail books or hire more staff. An investment in your business now while money is cheap will stand you in good stead as interest rates rise and rise, because you can create a little war chest to go shopping.
Top Mortgage Brokers have systems in place to action the above with ease. For them it’s like switching sails on a sailing boat. The downwind sail is packed away and now it’s time to ‘tack’ their way through the headwind.
If any of the above feels like a challenge for you that’s ok, you can learn how to implement systems that make your business profitable in both declining and rising interest rates.
If you want to discuss how you can prepare for rising interest rates, reach out to our Head of Sales & Business Development Daniel Cordukes for a confidential discussion, you can reach him at danielc@trailblazerfinance.com.au.
Good luck,
Jeff
Jeff Zulman is the Founder and Managing Director of Trailblazer Finance, a specialist financial services lender offering business loans, valuations and M&A buy/sell advice, specifically tailored for Mortgage Brokers.
Connective Asset Finance has announced the appointment of specialist lender, TrailBlazer Finance, to its panel.
The addition of TrailBlazer Finance introduces a funder whose sole focus is unlocking the value of intangibles to which lenders ordinarily give little or no value. This specifically benefits financial planning, property management, accounting and insurance brokerage clients who are typically hard asset-light but have built great recurring revenue streams. This allows them to monetise their recurring revenue without needing property to secure their loan facilities.
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We recently launched a new low repayment loan for mortgage brokers and financial planners. Designed to boost cashflow, the Balloon Booster is structured like a balloon loan and features lower monthly repayments and flexible end-of-term refinancing options, allowing the balloon to be paid out or refinanced into a two-year loan.
Importantly, the loan product allows brokers and planners to better manage cashflow and maximise working capital at a time when many small businesses are struggling with their short-term cashflow needs.
Jeff Zulman, Managing Director of TrailBlazer Finance commented, “We know from talking to our clients that right now many brokers and planners need a short-term cash boost to free up working capital as they navigate the evolving post-COVID-19 market.
The Balloon Booster is designed specifically for this purpose. It is a low repayment product, with repayments 50 per cent or lower than those of our standard loan product. This helps our SME clients manage cashflow when they need it most.”
The new loan product further strengthens the specialist lender’s offering to its broker and planning clients, with Mr Zulman adding, “TrailBlazer Finance is committed to delivering the best possible solutions for these white-collar professionals. We are proud to be able to provide a product which is tailored to the needs of our clients, and the industry more broadly at a time when others are tightening their credit criteria and raising rates.”
In an excerpt from his recent interview with Stuart Donaldson at the Mortgage Business Commercial Masterclass, M&A specialist and TrailBlazer Finance Managing Director, Jeff Zulman, explains why brokers who can hold on through the current cycle will emerge stronger.
Adapting Geoffrey’s Moore’s Crossing the Chasm, which taught the start-up community how to leap the chasm between early adopters and the early majority, Jeff applies this model to the mortgage broking industry in a COVID-19 landscape.
He surmises that the Australian mortgage broking industry has experienced its halcyon stage, growing its market share from 18% in 2002 to a high of 60% in 2019 to hover around 55% in 2020 (Source: MFAA). Along the way it has suffered a litany of setbacks – the GFC, increased regulation and then the threat of abolition of trail – and finally finds itself in the COVID-19 chasm, the “valley of death”.
For those brokerages with the strength and resilience to survive this current phase – those that can demonstrate their ability to transcend cycles, build value and sustainability and come out the other side – steady, mature growth awaits, and, with it, tremendous opportunities from an M&A perspective.
Watch the short interview: M&A expert Jeff Zulman tells mortgage brokers to hold on
Crossing the COVID-19 chasm
If you are looking for advice around acquiring or selling trail books or need a cash flow boost, contact us today for a confidential conversation.
It goes without saying that large and small businesses alike are facing unprecedented challenges in the current environment. Brokers are certainly well-versed in how to hand tough times. What we know from those times is that where there are challenges there are invariably opportunities. Sometimes it’s simply a question of finding a partner to help you realise those opportunities when they present themselves.
In 2014, Chris Booth caught wind of an unmissable opportunity. At the time, he and his other business partners were running a successful full-service financial advisory business, Announcer Mortgages (now Infocus).
When they were offered the chance to buy an undervalued client book, an acquisition that would allow them to increase their footprint and further diversify their business, they decided to try to pull together the funds to make it happen. Knowing the book would eventually appreciate, they hoped to engage, convert and grow as many clients as possible before selling the book at a higher multiple.
Chris Booth, Head of Lending, Infocus
Finding funding
Having pooled their income streams, Chris and his partners shopped around for lenders to fund the purchase. Unhappy with the options available to them, Chris spoke to the Executive Director at his aggregator who facilitated an introduction to TrailBlazer Finance’s Managing Director, Jeff Zulman. Using a specialist trail book loan from TrailBlazer, Chris and his partners were able to borrow against Announcer’s mortgage trail book, rather than risk personal assets, in order to free up the capital to buy the book.
“In the end, we proceeded with the loan purely because of Jeff and the team. They made themselves physically available to us throughout the process and it gave us great confidence, both personally and professionally, that we were making the right decision with the right lender.”
Making growth happen
At the time of purchase, Chris was working with another part-time broker. While the business didn’t convert quite as many clients as they’d bullishly projected, they did manage to sign on around 500 fee-paying full-service clients from that book alone. By the time he and his partners decided to sell the business three years later, Announcer had increased in size to three full-time brokers, their client roster had more than doubled and the business had grown by almost 130 per cent in terms of the underlying trail. They subsequently sold the business to Infocus in 2017, repaying any remaining debt and banking a tidy sum.
Words of advice for brokers looking to grow
While Chris is the first to admit the industry is in a very different place in 2020, post-Royal Commission and mid-COVID pandemic, he would do it all over again. As a small business success story, does he have any advice for other brokers seeking to grow their business through acquisition?
“Using borrowed money is a good way to acquire clients and build your business quite quickly. You have a warm opportunity to call which makes it so much easier than building a book from scratch. Would I buy a mortgage book right now? Absolutely yes, the multiples are good, even though the market has some unknowns after the Royal Commission.
Acquisitions done properly absolutely work. However, be ready for it to take far longer than you’d expect to work a client book effectively. Ultimately, you still have to win the hearts and minds of the clients. One of the biggest learnings from the financial planning industry is that they didn’t try to win the clients. You have to call and build relationships, be proactive and be positive. Building those relationships is everything.”
Let us help
If you would like to find out about how we can help your business grow with our unique loan products for brokers and other white-collar professionals, please contact us on 1300 139 003 or at info@trailblazerfinance.com.au
I started my year with a scary experience. Whilst ocean swimming early one morning with friends beyond the breakers, I lost my form – and then my nerve. With my friends out of sight and shouting range, I decided to make my way back to the safety of the beach. However, to do so meant battling through a churning, dumping swell. I felt totally out of my depth. When, finally, I made it unsteadily to the shore, I was shaking, heaving and questioning my choice of hobby. Fortunately, it was just one bad day at the beach for me. I could chalk it up to experience and I was back in the water two days later. I am one of the lucky ones.
While listening to a recent podcast with Accountants Daily, My Business Editor, Adam Zuchetti about small business tax debt, I had a flashback to that experience for an entirely different reason. Adam reported that a staggering 20 per cent of Australian small businesses are currently on an ATO payment plan. That’s some 800,000 small businesses who are financially overwhelmed, many of whom are drowning in debt.
One of the more shocking revelations from the piece is the comparative level of SME (small to medium enterprise) tax debt when compared to corporate Australia. The former cohort owes a whopping $16.5 billion with $1 billion contested. Meanwhile, their corporate counterparts owe just $1 billion and are locked in disputes for six times that amount. This points to the glaring discrepancy in resources between the two segments and the ability of the big guys to fight back, whilst the little guys are often forced to roll over and get carried out to sea. Moreover, it hints at the ongoing role corporates play in stretching payment terms to SMEs, thereby contributing to SMEs failing to meet their tax commitments.
It also highlights the pervasive fear of retribution small businesses feel towards the ATO. This fear is now exacerbated by harsher penalties for missing tax payments, single touch payroll and new laws allowing the ATO to disclose tax debts to credit bureaus as part of comprehensive credit reporting. You may even have read recent press reports of harsh treatment on calls by outsourced “assistants”.
Daily, we also see a lack of understanding and education about the role the ATO does provide in easing the burden of tax debt – such as payment plans. Often SMEs mistake this for some form of back-door, inexpensive funding which, of course, it is not. The ATO is not a quasi-bank. This cocktail of fear, misunderstanding and concern about being sucked under contributes to murky and scary waters for SMEs who are struggling to meet their tax commitments. It can get in the way of proactively putting in place a plan to better manage debts by matching asset and liabilities and using recurring income to service longer-term, fully amortising debt.
I have started several small businesses myself and empathise with how easy it is to go a little off course and get sucked in out of your depth. Suddenly you are fighting the rip, rather than working your way clear. Progressively exhausting yourself and depleting your resources, unable to find a route to swim clear. We understand that an ATO payment plan is a sign of a struggle and that the struggle is real for small business.
Sometimes small business just needs someone to give them a break; throw them a life ring or give them financial support until they can catch their breath. There’s no shortage of new fintech lenders who have plunged into the market, particularly in the vacuum left by larger lenders. Some offer fast access to cash, but beneath the surface, their interest rates are so high they will inevitably cause an already weakened swimmer to drown under the additional debt burden. Have they helped the problem? Almost certainly some have, certainly in terms of addressing short-term cashflow needs. Are they solving the problem? Not really. The core issue of late payments will have to be addressed by government and regulators in due course.
The ATO will need to do more to educate small business about how they can help. In the meantime, the role of advisory services and prudent lenders in educating their clients about funding their businesses in a sensible way is more critical than ever.
As we swim out and greet 2020, will you be swimming responsibly between the flags or are you already a little out of your depth? As a sign of our commitment to small business, and staying afloat generally this summer we will donate $100 to Surf Lifesaving Australia, from each SME loan made to a financial planner, mortgage broker, accountant or property manager.
In our business, we often get enquiries from people who think we deal in second-hand literary books. At TrailBlazer Finance, we actually buy, sell and lend against trail books – which are not even close to story books. But these mistaken phone calls to our office became the catalyst for us to support a charity which is doing life-changing work for people who often can’t even spell B-O-O-K.
A few years ago, our Managing Director Jeff Zulman read John Woods’ remarkable book, Leaving Microsoft to Change the World: An Entrepreneur’s Odyssey to Educate the World’s Children. Jeff was inspired by how one person who recognised the power of words went on to establish Room to Read, a non-profit organisation focused on girls’ education and children’s literacy in Africa and Asia.
We later discovered that one of Room to Read’s annual fundraisers was a long trail walk in Sydney. There are too many coincidences here, Jeff thought to himself. We make money from books – albeit not literary ones – so why don’t we help others to read, write and benefit from books. In that moment, TrailBlazer Finance’s support for Room to Read was born.
According to the UNESCO Institute of Statistics, over 750 million people worldwide are illiterate. Two-thirds of them are women and girls. “World change,” says Room to Read, “starts with educated children.”They’re right: educating girls is much more than a gender equality issue.
As Damon Gameau’s recent documentary ‘2040’ makes clear, educating girls is a vital weapon in the battle against climate change. Why? Because empowering and educating women and girls means they are more likely to marry later and have less children, which leads to a lower population and less pressure on resources. In a recent Sydney Morning Herald article, Elizabeth Farrelly wrote that the film 2040’s “most surprising [moment] is the thought that the sixth most effective weapon (of a hundred) against climate change is educating girls…educating girls is worth 105 gigatons of Co2 due to its effect on fertility, population growth and land management.”
So now, your books – your trail books – are helping those less privileged than us to learn to read and delight in the power of words and literary books.We donated 100% of the proceeds from our recent webinar for mortgage brokers to Room to Read. This impressive organisation – which to date, has benefitted 16.8 million children and their communities – means that when you take a loan from TrailBlazer Finance, you’re also giving back: helping to combat the scourge of children’s illiteracy, to educate underprivileged girls and even to fight against climate change. Your trail book is valuable in more ways than you might have imagined.
The boutique financial service and niche lender, TrailBlazer Finance has just announced an innovative new product for clients looking to procure a loan to fund their businesses ongoing cashflow needs. Dubbed the “Multi-Redraw Facility”or “MRF”, this new financing option allows business clients to lock in a fixed rate, fixed term, facility for their business and then repeatedly come back for top-ups, to continually maximise the entire facility. Head of Sales and Business Development at TrailBlazer, Robert Seton, explained this innovative new redraw facility as being, “similar to having a come-and-go facility but with the unique feature of having the certainty of fixed interest rates.”
The product was designed for brokers or planners whose trail book (or recurring income) is stable or growing. Normally brokers or planners qualify for a loan but find that as they make principal repayments the amount they can borrow shrinks, providing less and less gearing over time. Now the borrower gets certainty (subject of course to ensuring serviceability) of both funding and rates, without the hassle of having to establish new terms, or vary their existing facility each time additional funds are required. This translates into faster turnaround time, with funds ordinarily provided within 96 hours of request. This simplified process is set to be a game-changer for those in need of funds for opportunistic purchases of other books or practices, or even emergency funds – whilst paying only a fraction of what some of the new breeds of peer-to peer-funders are charging. Unlike ordinary fixed-rate facilities, the MRF allow clients to quickly access finance at lower costs, thus ensuring security and accessibility for all in need.
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