How do brokers help clients find the best funding solution?
Which lender do they choose out of the thousands operating in Australia?
We talked with Allcap Finance’s Lincoln Frost about a broker’s journey through the waters of private lending and what it takes to succeed.
Go through our top five broker tips to get an insight into the industry!
Tip 1: Borrowers should count on brokers for more than just loans.
Private lending can be a jungle, with giant projects and supersized funding facilities. It is not like typical home loan finance. That is why you should lean on a broker for their expertise in lending as a whole. They often have years of experience in debt advisory all the way up the capital stack, which helps you get through tricky settlements.
Lincoln Frost comments that commercial broking is “a completely different ball game… its own beast.” There are bespoke structures, deadlines which need to be arranged around a project or investment, and expectations to meet from all sides. Brokers are not just a middle-man between funders and borrowers. They take on a whole range of equity solutions.
This gives them an edge in supporting a range in clients. There is “no typical day or client” in brokering according to Lincoln and that gives him confidence in his ability to serve a range of clients. One person could be looking for mezzanine finance on a huge commercial site and the other could be needing finance to complete the last stage of a boutique residential development. It all adds to their repertoire of experience.
Tip 2: Brokers thrive when clients have clear and specific funding needs.
Brokers are matchmakers. They find the most suitable lender for a client’s situation who is likely to approve them and settle on time. There are a lot of priorities to juggle, so it is crucial that clients have a clear idea of what they need from a lender in terms of structure, cost, and flexibility.
There is no one size fits all lender. Each of them has their strengths and the right one for you will depend on your needs. Lincoln says that non-bank finance intermediaries, like brokers, will have a “network of private funds and private credit lenders” which they’ve built up over time. This acts as a catalogue of options for a client so they can be matched with the most suitable lender.
Being able to communicate with your broker on what you need and why you need a loan will help a broker do their job more effectively. Well-connected brokers with a lot of experience have a clear advantage here. Their networks are more established and they’ve been exposed to a broader range of private lenders. They know everyone. Think of it like online dating in Sydney versus Broken Hill. You’ll have thousands of choices with a broker, but might struggle to find a first date on your own – in Broken Hill.
If you have more options you’re more likely to find that perfect match. But you’re not in the clear if you’ve swiped right.
You need the other party to like you back. This is where brokers come in. Their strong relationships with lenders make it much more likely they will come to the table, taking the pressure off. You are then in the best possible position to negotiate a funding facility and reach competitive commercial terms.
Tip 3: Brokers should vet their lenders before referring.
Choosing the wrong lender is like letting the wolf into the hen house. It can cost you hundreds of thousands of dollars and have disastrous consequences on your project, development, or investment.
Brokers are a safeguard against this.
Lincoln warns that “a lender doesn’t always have the certainty of funding behind them, and you won’t know unless you’ve dealt with them before.” He tells a story about a construction finance lender approving a client but failing to raise the capital for the loan. The lender wasn’t ready to settle so the client defaulted and a receiver was appointed within a few days.
He also says that understanding a lender’s boundaries and limits are important. Some lenders will charge default rates up to 20% p.a. if a client is a day late in payments while others are more flexible. Knowing which lenders are willing to work through difficult situations is a real value add of working with a broker.
Things can escalate really quickly and when multi-million dollar projects are on the line, the stakes for failure are too high. So it is crucial to have a broker that knows the market and understands the lenders they refer.
Tip 4: Brokers should prepare for the unexpected to manage curveballs.
Lincoln has a hero story of a client who went into receivership after their lender failed to settle. They were “about to lose the whole site,” putting a $100 million project in jeopardy. Remarkably, Lincoln found a lender willing to fund them on the last day of the year to settle the transaction.
The stress levels of these situations are easy to underestimate if you aren’t a broker.
Ulrika Lobo from Sparrow Loans notes, “something that borrowers might not appreciate is that [brokers] are sharing that stressful journey right there with them.” That is where some professionals differentiate themselves in the market.
Some brokers will be right alongside from application to settlement to exit. They are there for the whole journey, allowing them to deliver a smooth experience. A truly great broker treats borrowers like more than just a transaction. They take ownership of the client and build an authentic relationship with them.
So you as a borrower should really pay attention to the finance professionals you choose to work with.
Know the services they offer, look at their track record, and consider their payment structure. Brokers like Lincoln who are paid on success may give borrowers more confidence that they are getting a high value and high integrity service.
Tip 5: Borrowers should choose brokers based on their integrity and their experience.
Lincoln recommends choosing a broker you can trust. He has nearly a decade of experience in non-bank brokering and knows the challenges of the industry. Non-bank lending is a “fragmented market” which needs to be treated “like its own beast,” so you have to know your stuff. Working with an experienced and knowledgeable broker will put you in the best position to get the funding you need on the best possible terms.
He also encouraged borrowers to consider the regional experience of their broker. Surging construction costs, increasing rates, and changing feasibility make it challenging to invest or develop in particular markets. Experienced brokers like Lincoln will refer to their network to check if the costs and calculations make sense, and what needs to be changed in order for the loan to work out.
He says giving an honest answer, even if it is that the project won’t work, is crucial to maintaining transparent and honest client service.
There is a solution to help in every situation, but it takes a knowledgeable broker to pin it down.
In summary, brokers are a crucial cog in the financial system.
They keep the gears turning and put the power into borrowers’ hands. A broker’s expertise in structuring a loan, negotiating competitive terms, and finding the right lender for your situation make them truly indispensable.
We hope this article has given you a useful lens into the world of brokering. Using our tips and tricks will put you in the organised and prepared position you need to be in to make funding work for you.