Funding for SMEs hasn’t dried up entirely, but just like pretty much every other type of borrowing, it’s certainly gotten much more difficult to secure post-royal commission.
As a result, SMEs are increasingly turning to brokers for help finding lending alternatives to the major banks, something broker Joshua Carleton has experienced at SMS Finance on the Sunshine Coast.
While it has become more difficult to secure funding across the board, non-conforming/specialist lenders and private funders have become more prominent, he said.
“We have seen an uplift in SME clients as their usual channels of going to the bank direct have dried up. They then turn to the community and we see a lot [of business] from word of mouth,” Carleton said.
In this climate, more planning needs to be done by both SMEs and regular borrowers. At least on that front, SMEs tend to have the upper hand. “SMEs don’t typically think they are going to get an approval on first glance. They expect to have to plan for the future,” Carleton said.
SME lending and property security
Not only has the heightened scrutiny post-royal commission made it harder for SMEs, but so too has the cooling property market, especially when a property security is required.
“Any property market downturn means those who want bricks and mortar security will have less equity available to secure facilities,” Scottish Pacific CEO Peter Langham told MPA.
“In addition, Australian home ownership rates are falling. With more people renting, business owners will have to find funders willing to lend them money secured against assets other than property.”
Langham said that’s why brokers and their clients should be looking at other long-term working capital solutions, such as lending against invoices (receivables) and assets (equipment and inventory), which is what Scottish Pacific offers.
The non-bank lender’s SME Growth Index found that less than 10% of SMEs want to use property to secure their business loans and almost 80% would prefer a loan secured against non-personal assets (such as debtor finance, secured against receivables).
As the needs of SMEs change in this market, Langham thinks commercial finance brokers will find themselves with more client opportunities.
“Brokers can help SME clients find their best funding option by making them aware of how the different products work and what the risks and benefits are, especially when it comes to some of the newer market entrants,” Langham said.
The fintech advantage
It’s always been hard for SMEs to get access to funding, and it’s only getting harder, Beau Bertoli, joint CEO of Prospa, told MPA.
“The small business sector has been underserved by the banks and traditional lenders for a long time. Banks can’t assess small business credit risk economically, and historically haven’t had the risk appetite to do so. But small businesses need capital to grow and many can’t or don’t want to secure their business venture against a family home,” he said.
Regardless of any changes in the property market, many business owners want to keep their home separate from their work, which Prospa understands and has made possible by offering access to funds without the need to put their home on the line.
“If banks are tightening up their secured lending to small business, then we expect to see an increased awareness and interest in online lenders like Prospa in 2019,” Bertoli said.
The online small business lender assesses creditworthiness using smart technology. “We’ve always looked at over 450 data points when we make credit decisions, and this hasn’t changed since the royal commission,” he said.
Reflecting on the royal commission’s interim report, Bertoli said there appeared to be no desire to restrict small business lending further.
“We’re hopeful the final commission report will reflect that and not impose additional restrictions that might have unintended consequences. Our aim is to support as many small businesses in Australia as we can by providing fast, easy access to finance.”