What the banking royal commission means for SME lending
Increasing numbers of SMEs are turning towards alternative finance in Australia as the banking royal commission prepares its findings.
These are nervous times for the Australian banking sector. The banking royal commission is stepping up its investigation into the conduct of the major banks and financial institutions. It is expected that this may lead to a new lender landscape, with many candidates now seeking alternative finance in Australia.
Australians with personal accounts are already demonstrating their dissatisfaction and are turning away from the 'big four' banks in record numbers.
But what about SMEs?
These small and medium sized businesses are key drivers of the Australian economy. Most rely upon finance received from lenders. What can they expect in the aftermath of the royal commission?
Regulatory changes for banks in Australia
First of all, it should be noted that the royal commission is still ongoing. There are no guarantees as to what the outcomes will be. However, if the commission does find evidence of wrongdoing on the part of the banks - which seems likely - they will be forced to introduce new measures to bring financial institutions into line.
This will be a necessary move for the Australian economy, and for the banking landscape which is such a vital part of this economy. Despite weathering the financial crisis, Australia's banks have drawn criticism thanks to the prevalence of high loan-to-income mortgages in the country, and for a complacent attitude towards potential economic slumps in the future. Regulatory changes are of critical importance if these potential issues are to be averted in the future.
However, there is no doubt that the regulations, penalties and fines that will be imposed on financial institutions will have an impact on SME lending. These regulatory changes will be designed to reduce 'irresponsible' lending from banks, which means that many SMEs who are currently able to secure funding will suddenly be rendered ineligible.
Any SME with a less-than-perfect-credit history could find themselves in trouble.
Moves towards alternative finance options
Could this potentially harm the Australian economy? Certainly. Anything which dents the growth of SMEs will have an unavoidable knock-on effect on the financial health of the country. So what is the solution?
In the wake of the 2008 global financial crisis, alternative banks and lenders began to emerge, offering a different way of doing business for both personal and enterprise clients. While Australia was able to weather this fiscal maelstrom relatively intact, a new lending landscape emerged in this country too.
This new landscape - made up of alternative lenders and financial institutions - is where many of our SMEs are now turning to as they seek to secure reliable sources of finance going forward. This has kickstarted the rise of fintech - short for financial technology - and increased demand is fuelling growth in this sector.
But fintech is not a static market. It has long been understood that the problems associated with the financial sector cannot be remedied with tried and tested methods. Instead, innovation is required.
This has led to an increase in the prevalence of alternative lending models, such as:
- Balance sheet lending - by which streamlined financing approaches lead to a more agile and responsive model
- Peer-to-peer lending - by which finance is provided between peers rather than by a wider financial institution
- Crowdfunding - by which organisations publicise their projects and gather funding from their intended audience
- Supply chain finance - by which cash flow is improved as financial institutions accept customer invoices in lieu of immediate payment
A change already enacted
Already we are seeing small and medium-sized enterprises moving away from the more established lenders towards these alternative options, and this is before the royal commission has even published its findings.
There are a multitude of factors behind this, of course. One is the destruction of the trust which small business owners once had for the big banks, and another is fear that these institutions will no longer be able to provide the funding SMEs need.
Whatever the outcome of the royal commission's investigation, there is gathering momentum behind alternative lending institutions and growing interest in the advantages they can offer.
Andrew Colliver, chief executive, Banjo Loans