Businesses of all shapes and sizes have been impacted by the coronavirus and its associated economic downturn in the past few months, but the self-employed have the double whammy of having to face this crisis alone. Annie Kane takes a look at how the self-employed are faring, and what is being done to support them.
Partnered by RedZed
Being a self-employed sole trader is tough at the best of times, but being a self-employed person during COVID-19 is even harder. The strain that the downturn has placed on the economy has hit sole traders particularly hard, both from a financial and emotional perspective. With sole traders often putting all of their finances into their businesses, help for this particular segment is sorely needed.
Indeed, according to the second instalment of Momentum Intelligence’s COVID-19 survey of small and medium-sized enterprises, 56 per cent of sole traders have seen a decrease in revenue during the pandemic, with those working in aviation and real estate particularly badly hit.
The government has enabled sole traders to access JobSeeker and JobKeeper, take advantage of the increased and extended instant asset write-off, and access up to $10,000 of their super all in a bid to help the small businesses of Australia survive the pandemic.
Meanwhile, figures from the Australian Banking Association show that more than $4.5 billion worth of new business loans had been written by members for sole traders. But while some banks are supporting sole traders, it is getting increasingly harder for sole traders to take out new loans or meet the shrinking risk appetites of some of the major lenders. In May, for example, Westpac reduced its loan-to-value ratio to 80 per cent for self-employed borrowers, and many other lenders tightened up their offerings to sole traders.
The shrinking options for the self-employed when it comes to traditional banking has been a boon for those who focus their work on the self-employed sector – specialist lenders and finance brokers.
Indeed, given that nearly two-thirds of all small businesses are sole traders (totalling approximately 1.4 million people), there is a sizeable chunk of the pie looking to specialists for help.
Speaking to The Adviser, one such specialist – RedZed Lending Solutions – outlined that more borrowers have been coming to them for help since COVID-19 hit and for myriad reasons.
National sales manager Adrian Fisher elaborated: “In early 2020, self-employed borrowers were coming to us to access equity in their residential or commercial property for business expansion purposes – for example, by expanding through a large stock acquisition, purchase of plant and equipment, or increasing staff numbers etc. In our experience, these are typical transactions for self-employed borrowers trying to grow a business. But as soon as COVID-19 hit, that pretty much just stopped overnight,” he said.
While there are still pockets of the industry that are thriving and seeking finance to grow (such as those in the food, personal health and wellbeing, IT and computing, and delivery services), there are many more that are struggling (particularly those in the travel, hospitality and transport industries, like “private chauffeurs who spend their time ferrying people to and from the airport”, Mr Fisher said).
“A lot of people talk about consumer confidence, but SME confidence generally declines first. Typically, when there are signs of trouble in the economy, small-business owners can tend to sit on their hands and might not have the confidence to invest in their business as they would normally. Not surprisingly, we certainly saw people pulling back and being cautious and not willing to extend themselves in the same way they were prior to COVID hitting.
“Currently, the requests for equity release or cash-out are a lot lower than what they were in the first half of the financial year, and we’re now seeing a lot more debt consolidation, as business owners try to return cash to their business by consolidating and reducing monthly commitments,” Mr Fisher said.
Why the self-employed are moving away from traditional lenders
However, he added that RedZed is also seeing substantial interest from “traditional bank clients with clean credit histories but who are having difficulty providing the information that a mainstream lender requires”.
Mr Fisher suggested that this is not only because of the rigid policies of the mainstream lenders in a reduced risk appetite environment, but the lack of expertise in, and understanding of, self-employed lending. He further explained: “Commercial loans can be problematic for self-employed borrowers. We can see there are loyal bank customers that are now choosing to leave the bank purely because of the rigid annual reviews processes they need to go through.
We are seeing a definite increase in these types of customers coming to us. They have gone through the loan process with a big bank and post-settlement have had to provide financials on an annual basis and have their property revalued, with the result often being a request to tip in large sums of money back into the facility to remain with that lender,” he tells The Adviser.
“In these situations, where a business owner has been running their business with no headwinds and without any issues, they suddenly face major impacts on their cash flow as they have to come up with a large sum of money to reduce their facilities, which generally comes from their cash flow, and therefore impacts their ability to run their businesses.”
According to Mr Fisher, RedZed understands the challenges this segment faces and how difficult it can be to access finance as a business owner. He said: “We understand self-employed and the nuances that come with being self-employed – from not having a regular pay slip every week/fortnight/month, having seasonal businesses, structuring businesses to better manage tax obligations etc.
“Many of these characteristics might be quite complicated to mainstream lenders and computer credit scoring systems; however, we invest human time to understand the holistic picture of the business and provide solutions that can suit their needs.
“Accordingly, a significant part of our business is alt doc lending, where we use traditional and non-traditional income verification methods, such as accountant declarations, BAS, interim trading accounts or business bank statements in lieu of the two-year full financials and notice of assessments that many of the big banks require,” he said.
“We also like to think if a deal makes sense, and the applicants are credit-worthy, we’ll consider it. It’s as simple as that,” he said.
Supporting the mental wellbeing of business owners
Helping business owners in 2020 is not just about providing finance, but also providing a sympathetic ear at their time of need.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has been championing the need for mental health support for sole traders during COVID-19 and has been releasing resources to help – including the My Business Health web portal, which offers dedicated holistic support to employers and sole traders, and free online mental health webinar for sole traders – amid alarming predictions of a dramatic rise in Australian suicide rates due to the economic and social impacts of coronavirus.
“There’s no doubt this is a very difficult and uncertain time, but there is support for small businesses and sole traders, and I would encourage them to access the free resources and services on offer,” Ms Carnell said.
Likewise, brokers and lenders have been lending supportive ears to their customers, with many brokers spending time talking to their clients and checking in, regardless of whether they need any credit advice.
RedZed also reached out with its services, not only by offering repayment deferrals for those that needed it, but also ensuring they spent the time on the phone explaining the client’s options and offering additional support.
“One of the biggest pieces of feedback that we got from clients was just that we were answering the phone.
“One of the key metrics that we have is making sure that we answer 100 per cent of the calls within 20 seconds… We found our customers were so thankful to simply be able to talk to someone, and someone who knew business finance and what they were going through.
“Our customer service personnel took time to understand their position and were able to educate them on the options available, so they could make informed decisions. We didn’t lose any of that customer connectivity,” he said.
The lender also offered all its customers and brokers access to its Employee Assistance Program (EAP) “so they had someone to talk to if they needed some counselling”.
“Many business owners operate on their own, or are responsible for a small team and don’t necessarily have someone to talk to. So, we offered them free counselling sessions through our EAP program.
“When COVID-19 started, we also realised that a lot of self-employed people would be trying to reduce expenses, and advertising is one of the first things that is affected, so we reached out through our broker partners and also offered to provide free advertising for their customers via our Business of the Week profile through our social media pages.
“Some of our customers took up these options and were thankful to us for providing this type of support. It’s all part of RedZed demonstrating we understand the self-employed,” he said. “Our goal at RedZed is to be more than just a transactional provider of finance. We want our customers, and brokers alike, to know and feel they have a reliable lender they can turn to for assistance at any stage during their journey.
The future is bright
Looking forward, business owners have the luxury of being extremely agile and able to shift or pivot their businesses quickly, depending on how the wind is blowing. In fact, the most recent Momentum Intelligence COVID-19 survey (conducted over June 2020) found that the vast majority of small businesses (69 per cent) feel in a positive mental health state, with just 7 per cent stating they had negative mental health.
Likewise, Mr Fisher is positive about the future. He said: “We don’t know how long it will be before conditions improve significantly, but there’s always a reason for optimism because out of challenging situations like we’re currently experiencing come great opportunities, innovation and new ways of working.
“Self-employed people are typically very resilient. They’ve generally got a lot on the line and they have a lot of pride in their business. So, they’re very quick and nimble to move on and adapt. For those who have strong foundations, good business models, and are willing to look for opportunities and prepared to seize them, I think they’ve got great reason to be optimistic.”
Top tips for writing secured self-employed loans
The first thing is: Don’t be scared by it. Most brokers are comfortable reading pay slips and statements and establishing affordability. But the term “self-employed” can scare some brokers, especially if they have been subjected to a complex business structure, or complex set of financials.
But there are alternative methods to looking at self-employed borrowers, and that’s what RedZed specialises in. We make the process easy for brokers, by investing time in educating them on how to source and then assess a self-employed application (and all the nuances that come with it) and how to understand financials.
Similarly, don’t be scared by commercial loans. Brokers often think it is a complex beast, but it doesn’t necessarily need to be. Just be prepared to step outside your comfort zone a little bit, and you’ll actually find that it’s not that complicated, and lenders such as RedZed are there to guide you along the way. If you want to open the door to new and exciting opportunities, and grow your business with a borrower segment who are typically loyal, appreciative and looking for long-term relationships with solution providers, then embrace self-employed borrowers.
Another added bonus is you end up forming close relationships with accountants, who are great referral partners, too. All in all, don’t be scared to do it. Just make sure you partner with the right support team and you will reap the rewards.
Broker and associate director of The Lending Alliance, Theo Tsakirios, has been helping self-employed borrowers gain access to finance for over a decade, having been in business banking before becoming a broker. Here, he outlines why and how he helps this segment of the market
How and why did you start writing loans for self-employed borrowers?
Given the sheer volume of self-employed business owners and sole traders in the market (and enquiries we were getting), it was only natural that I look to expand on the offerings available to the self-employed to adequately service these clients. Sitting in my barber’s chair one Saturday morning, another fellow customer (also a broker) spoke very highly of RedZed Lending Solutions. First thing Monday morning, I reached out to RedZed to help fill a need we had in our business in this space. The rest, as they say, is history.
What makes a self-employed borrower different?
Self-employed client needs are no different to your traditional client needs. Where they tend to differ is in their ability to demonstrate or verify income/earnings over a certain period. The individual circumstances and availability or recency of the information and the lender requirements will dictate what information will be needed to deliver on their loan requirements. With a self-employed loan, the same principles of lending apply, although the income verification piece may take a different form relevant to the lender. Being able to deliver on what you communicate to a client in the current climate is integral.
What do you most enjoy about writing self-employed loans?
No two self-employed loan scenarios are identical, each has its own quirks. Every client scenario is different and unique (i.e. their situation and requirements), each presenting its own challenges. We are forced to think a little differently to find a solution that delivers on the client’s needs and objectives. The self-employed loan space is ever-changing; it forces us to forge relationships with different lenders and financiers beyond the traditional set of lenders, ensuring we keep abreast of the changes in this space. Self-employed clients are resilient. We find that self-employed borrowers truly value the assistance and support you provide and are inherently loyal over the long term.
What proportion of your clients are now self-employed borrowers?
Approximately 50 per cent are self-employed, with around 15 per cent being alt or low doc. But we have seen a steady increase in the level of enquiry coming from the self-employed sector year-on-year. We are seeing a number of self-employed borrowers looking to acquire commercial premises for owner occupation, access equity to support building and investing in their business, as well as some instances of cash flow assistance to see clients through a difficult situation.
Is it important to partner with a specialist lender for these borrowers?
Clients rely on us to put forward lender solutions that will deliver on a need, or set of needs/objectives, as it relates to their specific situation. When taking out a loan, it is important that we work with the lender who understands the business. True to their word, RedZed understands the self-employed sector and supports achieving favourable outcomes for their clients and broker partners. Their product suite, lending policy, turnaround times, and having direct access to the underwriter and, most importantly, relationship management are all exceptional and play a vital role in being able to deliver solutions time after time. Working with the likes of RedZed helps make brokers look like rock stars in the face of our clients, and that’s exactly the kind of interactions and reactions that we are trying to create. Our business and success are heavily reliant on our client’s experience and their referrals.
What tips would you give to other brokers looking to write self-employed loans for the first time?
Embrace self-employed loans and look to take advantage of the opportunity that exists in this space to find solutions for specific niches. Look to forge long-term partnerships with these lenders, and see how they operate and the value they add. Typically, the staff and support staff are well experienced and qualified to support the kind of outcomes you seek. They work with you on your first loan scenario and add value along the way. At the same time, it is critical to ensure you fully understand your client’s business intimately because the circumstances, commentary and rationale you put forward to support the loan request are key to the success of the application.
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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