When the economy sneezes, small and medium-sized enterprises (SMEs) tend to catch the worst colds. SMEs don’t have the luxury of unlimited capital reserves to call upon, which can create challenges when they’re operating in less than favourable market conditions.
It’s a sector that’s well worth supporting. In many ways, SMEs form the backbone of Australia’s economy, contributing to a significant proportion of employment and gross domestic product. But what is sometimes overlooked is the role they play in innovation.
Earlier this year, Reserve Bank of Australia (RBA) assistant governor Dr Brad Jones spoke about the challenge Australian SMEs have in finding finance for innovation at the Council of Small Business Organisations Australia’s National Small Business Summit.
“SMEs can introduce competitive tension to established markets that are typically dominated by larger incumbents, driving them to be more efficient in the process,” Jones said.
“And in generating or diffusing new ideas and better ways of doing things, they can create new markets for goods and services and facilitate the reallocation of capital and labour to more productive use.”
So, when brokers find credit solutions for their SME clients, they’re not only helping them navigate market pressures, but also giving them freedom to innovate. And providing these types of out-of-the-box solutions is an area where non-bank lenders excel.
Sector to support
The last few years have brought a fair share of obstacles for Australia’s SMEs to navigate. Inflationary pressures, the lingering effect of the RBA’s rate hiking cycle, supply chain disruptions, and, more recently, the Australian Tax Office’s plan to recollect debts incurred during the COVID-19 pandemic have all left an impact.
Part of the frustration for SME owners is that while all this is happening, access to capital has become more scarce, with traditional lenders cautious about the prospects of lending to segments that are perceived as being riskier, such as SMEs.
Roberto Sanz, general manager of sales and partnerships at non-bank SME lender Prospa, says this lack of capital has created operational challenges.
“YouGov research commissioned by Prospa has revealed that over half of SMEs (61 per cent) don’t have enough cash reserves to cover one to two months of expenses – well below the recommended six months of cash flow runway advised,” Sanz says.
“Adding to this, nearly half of SMEs say they have reduced their own income and a further 31 per cent have dipped into personal funds to pay business expenses as rising costs persist.”
SMEs have always faced unpredictable costs caused by pressures such as staff and inventory. The difference now is access to funding to ease the pressure isn’t so easily attained.
“While cash flow challenges aren’t new for SMEs, access to additional capital has become increasingly critical in the current environment,” Sanz says.
“At a time when small businesses often require solutions to their cash flow challenges fast, non-bank lenders are uniquely positioned to meet the evolving needs of SMEs.”
Non-banks to the rescue
With flexible lending options, quicker decision making, and the ability to create a more personalised approach, non-bank lenders can provide a solution.
Non-bank lenders deliver unmatched speed and quick access to funds
Roberto Sanz, general manager of sales and partnerships, Prospa
For Banjo Loans CEO Guy Callaghan, SMEs are an example of the type of organisations that have been sometimes neglected by traditional banks.
“The reason for this neglect could be for a myriad of reasons but the main ones are – not profitable enough for the banks, or perceived too high risk,” Callaghan says.
“For the area Banjo plays in, we offer far superior turnaround speed, less administration, use of modern technology, wanting to serve and get to know the client and their referral partner (broker), and Banjo offers SMEs unsecuritised loans where the banks don’t.”
This flexibility of product can be the piece of the puzzle that helps SMEs manage cash flow, service debts, or realise opportunities to expand through innovation.
“Small businesses continue to be underserved by traditional lenders and as they continue to review their lending appetite in a tightening market, they’re turning away from businesses who, now more than ever, need solutions to their cash flow problems,” Sanz says.
“Non-bank lenders deliver unmatched speed and quick access to funds. At a time when small businesses often require solutions to their cash flow challenges fast, non-bank lenders are uniquely positioned to meet the evolving needs of SMEs.”
The broker opportunity
During his speech, Jones noted the tendency for lenders to be more circumspect in financing SMEs, partly due to a lack of scale and the perception of volatile returns.
“If many SMEs feel as though they are kicking into the wind when it comes to access to financing, those winds can blow stronger still for SMEs seeking debt funding to support their innovation priorities,” Jones said.
He also said that given the overwhelming majority of firms in Australia are SMEs, it would take only a small increase in the share of these businesses to successfully innovate to have a material impact on the Australian economy.
“It is therefore in our collective interest for the financial system and policy settings to interact in ways that continue to support innovative Australian entrepreneurs,” Jones said.
In that sense, access to credit isn’t just something that’s keeping SMEs afloat, but rather what helps them innovate and grow. Brokers can contribute by putting flexible solutions, such as those offered by non-bank lenders, in front of their SME clients.
“There are so many non-bank providers with a myriad of solutions that are probably far superior to what the banks offer. It is the broker’s role to get to know what is on offer,” Callaghan says.
“The other really important thing for a broker to do, in fact this is far more important, is get to know their clients. What makes them and their business tick? What are their pain points? Then it is easy to offer the right solution to take away their pain.
“If they [brokers] want to give their clients the best service, including products that suit their client’s needs (instead of trying to get their client’s needs to fit the solution), then they 100 per cent have to look at what non-bank lenders offer. As a side effect, by doing so will make the broker look very knowledgeable and show they really care about their clients.”
