The alternative lender

However, recent research from Digital Finance Analytics revealed that 65­ per ­cent of small businesses are less than satisfied with their current banking provider and 75 ­per ­cent are willing to switch banks for a better proposition. With banks often taking weeks to process applications, the attraction of smaller, speedier non-bank lenders has been a major pull for small businesses, who often need smaller amounts of cash – that are often less attractive to major banks – and ­fast.

According to the CEO of business finance specialist Scottish Pacific, Peter ­Langham, there has been a 30 ­per ­cent increase in SME owners planning to fund their growth using specialist non-bank lenders, with one in five now indicating their intention to seek this type of funding.

One of the growing players in the non-bank arena is the Pepper Money, with its two year-old asset finance arm seeing many SMEs coming through its doors. Since its launch two years ago, the asset finance business has grabbed 1 ­per ­cent of the market­share.

Pepper Asset Finance’s head of sales Craig Edwards says home loans and asset finance cover the “vast majority of needs for­ SMEs”.

“We offer both chattel mortgages, a very simple loan where the customer owns the asset and we take a mortgage security over it, and finance leases – where the finance company owns the asset and the customer is technically renting it while paying a monthly payment,” Mr­ Edwards ­says.

“But the chattel mortgage is by far the most popular­ product.”

According to ­Mr ­Edwards, $28.4 ­billion of the $38.2 billion written across all general equipment finance in Australia last year was for a mortgage over an asset – whether that be a car or a piece of equipment.

He says the most popular form of finance Pepper Asset Finance has seen from SMEs has been finance for motor vehicles or commercial vehicles, followed by­ equipment.

“If they’re a landscape gardener, it might be for a very small Bobcat. If they’re a banker, it’s a banker’s chair. If they’re a plumber, it could be for plumbing ­equipment.

“Whatever the industry uses in business, they’re financing it. There isn’t just one industry in particular looking for finance. I would say that every industry is looking for it. Anyone that needs transport or cars or trucks will need finance.”

Other non-bank lenders are seeing SMEs take out personal loans. Unsecured loan specialist DirectMoney is popular with firms that want to boost cash flow management and working­ capital.

“There are lots of small business owners needing working capital just to grow rapidly or try and balance their working capital needs. It might be that they’re running a business by themselves and want to grow that business into something bigger, and they want to fund that without putting it all on a credit card,” the company’s CEO Anthony Nantes says.

“Typically, we’re seeing a lot of loans for cash flow management, although we also do some car finance for older vehicles that might not be able to get finance through other means.”

Mr Edwards says Pepper Asset Finance’s SME clients are “traditionally mum and dad businesses, ranging from two to 50 employees with a turnover of between $1-50­ million”.

He says the market is especially attractive at the moment, given the historically low interest­ rates.

“Now, you can borrow the money for the asset fixed rate so it’s fixed for the term, giving you certainty. And, as you can finance plant equipment as low as $10,000, it’s available to every SME.”

Online lenders

A major driving factor pushing SMEs to non says his company has been capitalising on the need for fast business loan approvals. When it started out four years ago, the group wanted to work out how the approval process could be streamlined using online data processing.

“We set out to build a whole different way of looking at credit to the way that the Australian banks and other financial institutions did and we created quite unique ways of assessing business owners’ credit information,” Mr­ Bertoli­ says.

For example, Prospa looks at reviews of the business online – say, a restaurant on Zomato – to assess the health and risk of a business.

“We provide a fast application process and a fast answer so you’re not waiting weeks and weeks like with the banks. Plus, we’ll provide a simple process so you don’t have to go and collect information from the accountant,” Mr Bertoli­ says.

Another alternative lender that utilises online data is Moula. The firm not only created a quick online application process, it also partnered with accounting software firm Xero to enable the automation of all financial analysing.

“What we do is access data online such as business register and accounting data. And then we can use that to lend to healthy businesses,” Moula’s head of broker distribution Andrew ­Lim­ says.

As well as utilising alternative means of risk and credit checks, the rise of the non-bank, alternative lending space has also been attributed to the increase in lenders bank lenders is turnaround time. According to Mr Langham, time is of utmost importance to SMEs, with business owners “cash-strapped and time-poor”.

“Of business owners [responding to the SME Growth Index survey], 72 ­per­ cent worry most about cash flow and 55 ­per­ cent indicated ‘having enough time’ was a factor keeping them up at night,” he ­says.

Online lenders often provide responses within 24 hours and it is hardly surprising that more small business owners are turning to this branch of the non-bank sector for their cash flow needs.

Beau Bertoli, co-CEO of online lender Prospa, that will offer unsecured loans, while most banks still expect customers to secure any loan against a mortgage. It’s a problem particular to Australia, according to the CEO of the Australian arm of online lender RateSetter, Daniel ­Foggo.

“Historically, the banks that would lend to SMEs would normally require security on their home, but in the UK and the US, that typically won’t be the case.

“If you’re a small business owner in Australia, and you don’t own your home or don’t have a lot of equity in your home, actually getting finance was quite difficult,” Mr­ Foggo says.

“That’s changed in the last few years as more businesses have come to the market offering SMEs unsecured ­loans.”

Mr Bertoli agrees, saying that online lenders’ willingness to be flexible has propelled their success.

“That’s the fundamental difference between us and the banks. A business owner can borrow from $5,000 to $250,000 and they’re not being requested to put their family home on the line.”

Instead, SMEs can back their loans with other forms of security. Mr Foggo says RateSetter has taken security on automobiles, trucks, and equipment, or caveat mortgages where relevant.

This flexibility in underwriting and risk adjusted pricing has given these peer-to-peer lenders an edge over traditional banks, as these companies have the time to research and learn about the different industries operating in the SME area and, crucially, are willing to do so.

Mr Foggo says one of the sectors RateSetter has had a lot of business from is franchises – from electrical to cleaning – that often struggle to get funding from banks as they “don’t quite understand their business model”.

For many SMEs, unsecured loans are an attractive proposition. According to the Scottish Pacific SME Growth Index, more than two-thirds (67.9 ­per­ cent) of SMEs are willing to pay a higher rate if it means they do not have to provide real estate ­security.

Unfortunately, SME loans do tend to come with a higher rate than an average mortgage. Many short-term loans ask for 15­ per ­cent interest, which can push some people to use their credit card instead. But, as fintechs look to pick up more of the market, this too is changing.

RateSetter, for instance, is providing rates starting from 7­ per­ cent and increasing to 20­ per­ cent, depending on the loan and credit worthiness of the ­applicant.

Broker proposition

With more lenders getting up to speed with the needs and requirements of SMEs, it just leaves brokers to take up the commercial lending mantle, Mr ­Foggo says.

“I think there’s more competition now for SMEs with all these online lenders and that’s a really good thing,” he says.

“Industry has to evolve from SMEs thinking they get a loan from their bank or they can’t get finance or have to rely on their credit card. There is an important role for brokers to play to make those customers aware of those options and provide a really good service in discerning between what option is right for their customers.”

Commercial broker Daniel­ Holden of HoldenCAPITAL agrees.

“There is a wide array of non-bank lenders out there, but they don’t all have the same product,” Mr Holden ­says.

“We’ve got, for example, about 90 non-bank lenders and investors on our panel that we work with regularly. However, any given project may only be of interest to maybe three of that 90 because they each have their own­ appetite.

“Now more than ever, it’s vital to be creative, but also understand your investor or lender’s appetites for new projects and what they can and can’t do.”

Huge opportunity

The opportunity for brokers to break into the SME space is substantial. A My Business SME Insight survey found that only one-fifth of SMEs use a finance broker for their lending needs. More than half (55­ per­ cent) approach banks directly for their finance, while 24­ per­ cent use ‘other means’ such as their own ­funds.

Stuart Donaldson, founder and owner of financial education business Banyan Co, says this presents “a huge opportunity for brokers to position themselves as trusted advisers”.

“As the primary interface between identifying needs and facilitating solutions with lenders, the broker should be the ‘go to’ person or SMEs. They have a unique position where they are across all the offers in the market and can remove the burden of applying directly to banks for funding needs,” Mr ­Donaldson says.

“I believe that, in the coming years, there will be a very clear and positive shift as the industry, the professional associations and the specialist media are very actively up-skilling, educating, promoting and supporting­ brokers.”

Peter White from the Finance Brokers Association of Australia (FBAA) echoes this sentiment.

“This is an opportunity for brokers to skill up and prove themselves to be an expert in this area. But, it’s key that brokers ensure they are properly skilled before they go into the deep end of that pool,” Mr White says.

But where to start?

According to Mr Edwards, the door to opportunity is car financing.

“I think [mortgage brokers] are leaving a bit of opportunity on the table for others to take, because they are ignoring car finance in particular, which is the easiest finance they could probably do. Every customer that they finance a home for (that is an SME) would probably have one or two cars for business purposes, and they should be doing the finance of those cars,” he says.

Meanwhile, Mr­ Donaldson warns that those who neglect to take on the SME market will miss out. 

“Brokers have the tools, the products, the client base, the confidence and, in many cases, the skills … but inaction is leaving the door wide open to leakage, and maintaining growth will be difficult in a very crowded and expanding­ market.”