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SMEs remain one of the most underserviced client segments by big banks and the tumultuous nature of the last year has seen bank lending appetite to small business decline even further.
The Adviser has already reported on the opportunities this could present for business loan brokers who are looking to upskill their staff in order to better serve SMEs.
Peter White, the Managing Director of the Finance Brokers Association of Australia has explained, “Many business owners are not aware of the significant increase in fintech and non-bank lenders, but unless finance brokers understand this market – and this includes the ability to comprehend business accounting practices – our industry won’t be able to take full advantage of it.”
It’s important then for business loan brokers to better understand both the non-bank lending options which are available to SMEs and the individual nature of an SMEs’ financial statements which will differ to that of larger organisations.
Traditional credit guidelines determined by banks can often result in SME loan applications being rejected, but this isn’t necessarily the case for non-bank lenders. The small business lender OnDeck has recently announced a new risk-predicting credit model which it says should support a more tailored risk assessment for SME lending, particularly newer businesses and those that may not have substantial volumes of data.
As business loan brokers seek to step up their SME offering, it comes amid increased competition from the rise of a new breed of business loan matchmaker, known as a business loan marketplace. These free-to-use algorithmic based tools analyse the information input by prospective borrowers in a quest to find the best business loan for small businesses. Providing an almost identical role then as a business loan broker.
The algorithm's success is dependent on the data it is provided - the more information a prospective borrower can input the more likely they are to find a suitable lender with higher chances of approving a small business loan. By inputting some basic information, including the industry in which they operate, the turnover of the business and synchronising their bank accounts, a business loan marketplace can make an informed decision as to the most appropriate lender for a business and how much they should apply for.
Performing absolutely no small business lending themselves, business loan marketplaces consider themselves technology companies that can help SMEs get the funding they need quickly. So whilst business loan brokers seek to improve their knowledge of SME cash flow and non-bank lenders, machine-driven AI is already performing this very function.
Can an algorithm provide a better service than a business loan broker? Much would depend on the quality of the loan broker and the quality of the AI that’s been programmed but this isn’t necessarily the right question to ask anyway. Do they provide a service more closely aligned to the demands of an SME? Arguably, yes.
With a business loan marketplace, an application can be completed totally online and takes just a matter of minutes. The services are usually completely free-to-use too. Time-sensitive SMEs will surely like the idea of real-time results and the ability to fine tune their search for small business loans at no added cost. Working with a business loan broker is almost certainly going to cost the borrower more.
Whether processed by a machine or a credit analyst, lending is also a largely data driven decision anyway. The data will ultimately determine whether credit should be extended and the risk factor involved, which will then directly correlate to the borrowing costs. The key is in understanding that SME data can be more limited and this isn’t necessarily a reason to reject an application.
A business loan marketplace will analyse a borrower's bank transaction data (rather than the rigid credit guidelines around financial statements with banks) so it is also closely aligned to the lending process a non-bank lender is likely to conduct as well. And whilst business loan brokers try to expand their network of non-bank lenders, business loan marketplaces have used relationships with non-bank lenders as the foundation of their tech platforms. In fact, most business loan marketplaces work solely with alternative business loan providers. Whilst some, such as Valiant Finance, comprise of largely alternative lenders but with a handful of mainstream banks to boot.
Lend.com.au, the best rated small business loan marketplace by smallbusinessloansaustralia.com is one of a number of business loan marketplaces to have launched in Australia in recent years. The results of their proprietary data analysis will show SMEs how much they can borrow, their chances of approval and the lenders they should apply to. All through a visual and easy to digest lending dashboard.
The long term prospects for business loan brokers within the SME sector will depend on how brokers react to the threat posed by business loan marketplaces and how much further the algorithms developed by lending marketplaces can be improved. Algorithmic based lending analysis already proves faster and more efficient than human manual labour. As these develop they are likely to improve in their effectiveness too - fine tuning their effectiveness to match prospective borrowers with the lender most suited to their requirements.
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