Finance made to measure

Short-term lending by nature is highly flexible, quick and tailored to reflect the needs of individual borrowers. In many ways, it’s just what small business wants, so why isn’t it more popular?

This type of lending has, in the past, been associated with a ‘shady’ side of the finance sector, but those

misconceptions are long gone, so it can’t be that. And of course, the costs associated with this type of lending are typically a bit higher, but for businesses crying out for capital it’s surely not that either.

According to Andrew Colliver, chief executive officer of Banjo Loans, it’s simply a matter of awareness.

“Market awareness for alternative finance providers in this country is incredibly low,” he says.

In fact, according to the December 2015 Banjo Small Business Finance Survey, an online survey of approximately 850 Australian micro to small businesses, just 16 per cent of small businesses are aware of online alternative finance options, such as Banjo.

Citing a different survey, Aris Allegos, CEO of Moula, another short-term small business lending platform, claims that there is an even lower rate of awareness.

“We did a survey at the end of last year, where we went out to a pretty substantial sample. We asked: ‘Are you aware of nonbanking lending options outside of the majors?’ Only three out of 100

respondents had some awareness and the other 97 didn’t.”

Considering how critical access to finance is for small businesses, these numbers are incredibly low. Research undertaken by the IPA Deakin University SME Research Partnership shows that on average, 28,000 Australian businesses each year face a binding finance constraint, whilst 118,000 face some access to finance issues. While short-term lending isn’t suitable in all situations, it must surely be suitable in some.

This point of suitability is something the lenders are very quick to establish; they don’t want to lend money where it’s not appropriate and they want that fact known.

“Short-term lending isn’t the answer to all financing problems but it’s the answer to some,” says Mr Colliver, from Banjo. “SMEs really need to be using short-term financing for the appropriate purpose,” he adds. “Of the SMEs we deal with, in excess of 50 per cent of them are using it for expansion purposes to grow their business, and another third are using it for working capital purposes and asset purchase,

like inventory.”

“It’s about matching the loan type with the business lifecycle or the purpose, the asset lifecycle. You wouldn’t want to see an SME using short-term funding to buy an asset that depreciates over  ve to seven years; that would be a tragedy,” Mr Colliver says.

Filling a void 

Mr Allegos, from Moula, puts the current situation down to a historical lack of presence. The short-term lending market has been almost non-existent in Australia in recent years.

“In Australia, for quite some time, the majors haven’t played in that short-term unsecured space; they haven’t had a presence other than the credit card or the overdraft facility.”

He says those are useful tools if it’s business as usual and you just want to ‘dip in and dip out’, or use some extra cash for an emergency situation. “But if you’re a small business and you want to grow or

you want to deal with a one-off type situation, there’s actually been no access to an instrument that really deals with that.”

The missing link

With the need for alternative financing options widely accepted but the awareness of such instruments remarkably low, there is a great opportunity in this space for accountants to really help their clients.

“The accountants that we have been working with are using short-term lending as a value add service,” Mr Colliver says. “Where the accountant is giving advice about a few different options, it’s almost like there is a broadened range of services that can be brought to the table.”

Mr Allegos agrees. “They are in a position where they can obviously provide a really strong value add service by virtue of that strong recommendation,” he says. “It’s something that isn’t widely known throughout the community. Everyone knows about going to the big four, but no one knows about going to a business like Moula. So to that end, an accountant is in a great position to actually be perceived as an adviser or facilitator of that borrowing.”

And while it’s good for accountants, it’s not a one way street. “We are very much reliant on accountants referring business to us,” Mr Allegos admits.

Further embedding these types of lenders in the accountant’s sphere is technology, which now allows lenders to plug into accounting software such as Xero.

“We have been underwriting using their data and consuming their API since the start of last year,” Mr Allegos says. “Basically, it just gives us a broader understanding of the business we are lending to.”

Mr Allegos says that by taking the data through an accounting software’s API and then having a relationship with an accountant, it means that the lending process can be accelerated, which is a huge benefit for the client.

“In a lot of instances, if you want short-term funding you want it because you know you can get a discount on that inventory, or because some of your staff have just resigned and you need to make them whole. Those typical decisions are short term in the sense that you only need the funding for six months. But they are also short term in the sense that businesses need that funding yesterday.”