The Current State of Lending and How Australian SMEs are Fuelling their Growth
Different types of alternative lending are shaking up finance and becoming a key component to small business growth.
The phrase 'alternative lending' is gaining popularity and becoming standard practice, rather than being a niche option for those dissatisfied with offerings from the major banks. Alternative lending is now emerging as the most popular form of funding for Australian SMEs. In 2017, KPMG reported that the size of the alternative lending market is now valued at over $610 million (including peer to peer lending and crowd funding) , a growth of 53 per cent YoY and is expected to grow at 100 per cent this year. Access to capital via this type of funding is providing a serious boost to small business growth.
The dramatic shift is a response to projected changes in the banking landscape and in the way banks lend to small businesses. With serious doubts now cast over the future of traditional SME funding in Australia, increasing numbers of businesses are looking to fintech organisations and alternative lenders for their financing, something which will only benefit the Australian economy going forward.
Let's take a look at this in more detail.
Funding anxiety and its impact on SME growth
Securing funding has always been a major concern for small business owners. However, things have recently taken a turn for the worse. The funding landscape has never been so difficult, or so confusing, for SMEs.
The way in which Australia's banks weathered the 2007-08 financial crisis impressed many. But this in itself has led to issues that we're experiencing the fallout of today. Complacency and a self-congratulatory attitude following the crisis soon began to damage the reputation of these major financial institutions. Furthermore, startling revelations regarding dysfunction in the banking sector are further eroding that trust.
With the royal commission now exposing how major financial institutions have mishandled business funding, and working towards imposing regulations of their own, many banks are changing their lending criteria. This is leaving SMEs out in the cold.
It is unavoidable that these changes will hit small businesses hardest of all. In June 2018, the office of the Australian Small Business and Family Enterprise Ombudsman released a follow up to its 2017 report, Barriers to Investment. Entitled Affordable Capital for SME Growth, the report raised serious concerns regarding the damage reduced access to funding could do to SMEs.
"In Australia, lenders consider SMEs high risk and offer capital with restrictive terms and conditions, at high-interest rates and demand bricks and mortar as security – which is usually the family home," Australian Small Business and Family Enterprise Ombudsman Kate Carnell said in her report.
“Unfortunately, the unintended consequences of the financial services royal commission for SMEs might be an increase in banking regulation, making it even more difficult for them to access affordable growth capital."
“I regularly remind people that SMEs are the engine room of the economy, but the engine won’t work without petrol, which is seed capital and growth finance," Ms Carnell continued, highlighting how any dent on small business growth is also a dent on the Australian economy.
How SMEs are turning towards alternative funding to fill this gap and to secure growth
There is a hole in the Australian SME lending market, and, like all holes in business, this must be filled. Fortunately, alternative lenders are rising to the challenge. Increasingly, it is through alternative finance channels such as Banjo Loans that SME's are receiving the capital they need, not only to survive, but to thrive.
Another report - the SME Growth Index, released by Scottish Pacific in March 2018 - polled more than 1,200 SME owners. While 90 per cent of the businesses polled admitted experiencing cash flow problems during 2017 - indicative of the problems many SMEs are experiencing - an increasing number reported that they are looking to alternative funding sources as a means to secure their future.
In the report, Scottish Pacific CEO Peter Langham said, “The trend towards alternative lending is not just an Australian phenomenon. A 2018 OECD study found that SME over-reliance on banks is changing, with rapid growth in the alternative funding sector. Growth was especially high in the US, UK and China, with Australia likely to follow this trend.”
The KPMG report Cultivating Growth: The 2nd Asia Pacific Alternative Finance Industry Report revealed that Australia’s alternative finance market has grown 53 per cent over 12 months from September 2017 and has become the second largest market in Asia region.
In fact, the number of small to medium businesses seeking alternative funding is now almost equal to the number receiving funding from mainstream lenders. It is projected that the popularity of alternative lenders will exceed that of the big four banks in the near future; a shift fuelled by uncertainty over the banking royal commission's regulatory recommendations.
As the goalposts shift and funding requirements change, alternative lenders are going to play an increasingly important roll in securing growth and stability for SMEs; two elements that are critical to our economy.
While regulatory changes will dent SME growth in the short term, we can expect alternative lenders to take up the slack in the long term, hinting at a bright future for Australia's innovative small and medium sized enterprises.
Guy Callaghan, head of growth, Banjo Loans