Business finance, funding, overdrafts, working capital. Name it what you will, at some stage the…
Need Finance? Maybe You Don’t Have to Go to the Bank
I don’t know if anyone else is experiencing this, but I have noticed a marked increase in the number of emails and junk mail I am receiving urging me to take up an offer of a small business loan. These missives aren’t coming from the big banks either. They are from so-called FinTech companies.
The term FinTech is short for Financial Technology. The FinTech companies, “use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.” Infinite Financial Intermediation.
I started looking for some statistics to confirm my observation, and quickly found out that my hunch was indeed correct. More and more small businesses are using non-traditional lenders to access business finance. In a recent survey, 39 per cent of SME owners said they were “actively considering” a move to a non-bank lender. That’s a lot of business owners. Fintech lending has grown from zero in 2014 to $25m in 2015. Morgan Stanley predicts that the Australian market will reach $11.4 billion by 2020.
My marketing brain tells me that if almost 40 per cent of business owners are actively looking at a new product and the number of market participants and market value has increased by that much, there must be a demand for it. The reason for the demand is very clear, and has been so for quite some time.
“Traditional banks are not very good at small business lending”.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, released the report from an inquiry into small business loans at the end of 2016. I’ll write more about the actual report in another post, but for the moment, I wanted to get my head around the surge in non-traditional lending.
They want your family home
Australian SME’s find it very difficult to access capital. Generally, they suffer from three disadvantages:
- They don’t own real estate assets.
- They don’t have extensive credit histories.
- They don’t have a proven business track record.
These three factors together ensure that somewhere between 20 per cent and 50 per cent of small business loan applications are declined (depending upon which research report you read). The result is stifled business growth and reliance on personal funds or credit cards. The family home or other real estate assets will be required as collateral for a loan, so the business owner ends up with a mortgage (or even a second mortgage) on what is usually their most significant asset.
As banking industry researcher Martin Smith said,
“It’s exceedingly difficult (to get finance) beyond lending against the family home. Eventually they will run out of homes to lend against”.
Please hold – your application will be assessed at some future date
Small business owners can wait weeks or even months for an answer on their loan application. Business plans go on hold, and there are undoubtedly many sleepless nights for business owners waiting for finance.
After we’ve chopped down a forest of trees
I know you will have experienced this yourself, even in a personal capacity. Loan documents consist of reams of paper, written in a language spoken only by those inducted into the world of banking.
The attraction of FinTech lenders lies in these issues. FinTech lenders can give an answer in close to real time, without sacrificing a forest of trees and without you having to commit your real estate assets as collateral.
Such has been the disruption caused by these new SME lenders that the big four banks have moved in as well, making referral deals with FinTech lenders for clients they are unwilling to lend to themselves. For example, Commonwealth Bank refers to OnDeck and Westpac refers to Prospa. Many of the new FinTech entrants have moved into the Australian market from the US.
A trend to watch
As business owners, we all need to be aware of changes happening in our external environment, and make our best guess at what the implications are for our own business. In just a couple of years, FinTech lending has created considerable disruption in the finance industry, and I’m sure there is more to come. As with every new trend, there will be traps to look out for, but this particular disruption may unlock significant growth in the Australian economy by allowing SME’s to unleash their growth plans.
Watch this space.
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