Have you noticed how easy or difficult it has been for SMEs in Australia to secure credit in the past several years?
We’ve seen how they have struggled to secure funds with major banks tightening credit terms in anticipation of regulatory moves. The regulatory stir-up by the Banking Royal Commission, and the increase in banks’ market risk capital requirements by the Basel Committee have affected the funding landscape.
Traditional lenders, continue to focus on lower-risk, large firms that meet their benchmark figures for criteria such as profitability. Consider this - there is a $70 billion funding gap for Australian SMEs as traditional lenders still focus on businesses with over a 100 million turnover, according to a recent study by asset manager firm Arowana*. Banks also demand significant property assets as collaterals. The entire application process is infamously lengthy and cumbersome, as validated by the many SMEs that we interact with closely. This leaves small businesses with few options to fund their nimble expansion plans.
SMEs are a significant contributor to the economy. We strongly believe that there is an urgent need to meet their rising demand for quick, online, unsecured finance. Else it can constrain their appetite for innovation, force layoffs and worst of all, lead to bankruptcy. Thankfully, in the past few years, several alternative business lending options including unsecured business loans have emerged shaking up the small business financing scene in Australia.
SME lending shifts from major banks to non-bank lenders
Many small businesses are approaching alternative money lenders for easier, quicker financing for their fast-paced operating plans. And the number is rising. The number of alternative lenders has also grown significantly in the last few years. Around 19% of Australian financial startups were associated with lending, according to Ernst & Young’s 2018 Fintech census. Early 2019 also saw the Australian Securitisation Fund legislation clear both houses of parliament. This means that a $2 billion fund will help small lenders provide more capital to businesses.
Another encouraging trend is that money lenders have been making quick product and business model innovations - balance sheet business lending, P2P / marketplace lending, invoice trading, online, subscription-based loan funds, and so on. This new generation of lenders have streamlined the borrowing process immensely. It is now possible for businesses to qualify for loans in just a couple of days. Contrast this with the weeks and months required earlier.
In 2017, the country’s alternative finance market grew a whopping 88% over the previous year to reach $1 billion! This amounted to 32% of the Asia Pacific market share, excluding China (KPMG’s 3rd Asia Pacific Alternative Finance Industry Report, Nov 2018**).
What does this mean?
SMEs no longer view alternative lending as a last resort to be used when dissatisfied with the services of big banks – rather this has come out into the mainstream, as a standard practice now.
How have things changed for SMEs?
Innovative lending strategies have created unique opportunities for investors and financial institutions. It has also given SMEs a boost to grow with quicker, efficient access to capital with fewer impediments in the application process.
Small businesses benefit in many ways from this trend:
- Easier, quicker application process: There are fewer criteria to fulfill, and less red tape to cut through.
- Flexible credit limits: These lenders usually offer flexible terms and work on one-on-one relationships.
- Technology and human connect: The combination of technology and a personalized connect with lending specialists augers well for small businesses whose needs are very dynamic and specific. They benefit from personalized advice on lending products and are able to pick what suits them best. Fintech companies also provide transparent platforms –added value to small businesses.
Outlook for the future and how SMEs can ride on this trend
We should anticipate systematic regulatory changes in unsecured business funding in the near future. Regulatory changes will likely foster competition in the SME lending space. It will enable small lenders to compete with mega banks. This will improve lending confidence and boost small business growth in the longer term.
As an SME, you must be well aware of your funding options. Continue to actively seek out emerging options and find the right lender for your business. Utilize resources such as the new website launched by the Australian Banking Association (ABA) and the Council of Small Business Organisations Australia (COSBOA) that provides resources for small businesses, including a detailed guide to securing finance. Compare financiers based on monthly repayment charges, interest rates, minimum conditions, and other loan terms. Also evaluate them based on their transparency in rates, fees, and commissions.
Plan to fund short term projects by picking an online lender who has robust and quick processes in place. And in case of longer-term expansion plans, pick a strategic partner and trusted advisor who can add value to your business trajectory in the long run.
* $70 billion funding gap – A study by asset manager firm Arowana https://www.mybusiness.com.au/finance/6199-smes-facing-70bn-funding-gap-analyst
** KPMG’s 3rd Asia Pacific Alternative Finance Industry Report, Nov 2018 https://assets.kpmg/content/dam/kpmg/au/pdf/2018/asia-pacific-alternative-finance-report-2018.pdf
Tagged in: Business Loans, Alternative lending in Australia, Unsecured Finances, Quick Finance, Small Business Loans, Alternative Finance