Let's do a quick recap of what's happening in the small business landscape, before we dive into the trends that we're observing.
The terminology can get a bit confusing. So, what kind of business is classified as 'small business'?
A number of datasets are collected by the Australian Bureau of Statistics, and they use the following scale:
- Sole trader or sole practitioner
- 1-4 employees (micro business)
- 5-19 employees (small business)
- 20-199 employees (medium enterprise)
- 200+ employees (big business)
When we talk about small businesses, we're generally talking about micro businesses, small businesses and the lower end of the medium enterprise. There is huge potential for growth in this market, but sourcing capital remains a challenge across the board. If small businesses can't access capital, they are unable to take advantage of growth opportunities that come their way. For example, they wouldn't be able to take on an exciting new client if they couldn't afford to buy the inventory required to complete the job upfront. This is an example of a mismatch in cash flow timing.
Mismatches in cash flow timing continue to plague small businesses. Many businesses get caught in a cycle of having unpaid invoices, which prevents them from having the money to purchase new inventory, take on new clients and fulfil new orders. Whether you're talking to a tradesperson, a restauranteur, a manufacturer or a startup founder, you're likely to discover that very few businesses are immune to a mismatch in cash flow timing. This is where sensible small business financing options can really add value to a business, and reduce the struggle and stress on the business owner.
When you're speaking to your clients, don't forget that some business owners are not motivated by growth. Perhaps they started their own business in order to enjoy a certain lifestyle. Perhaps they just want to turn their hobby into something that earns them a reasonable wage. These business owners might still experience a mismatch in cash flow timings, but their needs will be very different from those of small-to-medium sized businesses that want to turbocharge growth and maximise their return.
The good news is that the market is flooded with new options tailored to these clients, but it's important to make the right recommendations to business owners.
It's time for a deep-dive into the trends we're observing in the market.
1. Research & Development (R&D) tax incentive
Finding finance when you don't have any trading history can be really difficult, and as you know, many lenders require a real estate asset as security. If your client is a startup founder at the beginning of the journey, and they've already asked their friends and family for a cash injection, they might be happy to hear about the R&D tax incentive. This is a great suggestion to make to a client in this predicament, to enable them to accelerate initial development and move through to their high growth phase.
This government incentive is designed to fuel business growth and encourage entrepreneurship. It provides a tax offset for eligible research and development activities, making it more cost-effective to develop new businesses and build the resources to support them.
It isn't available to every startup, so be sure to explain to the founder that they'll need to do some research into which industries and sectors are eligible for the incentive. It also requires quite an involved application process, so don't forget to tell the client that it will be a bit of a time investment, but totally worth it (provided they enquire about their eligibility upfront)!
The downside of the R&D incentive is that you have to submit your claim during certain times and some startups experience delays in processing. This can still result in a mismatch in cash flow timings. For example, if you need to pay invoices or salaries while you're waiting on the offset, it can be stressful.
If you've got a client in that scenario, you might want to suggest Rocking Horse - an alternative lender who is able to pay your R&D claim upfront in exchange for a fee. These services offer greater flexibility but should be entered into with full awareness of the contract.
Where can you send clients who want more information? Right here.
Another trend we're excited about (okay, excited is an understatement) is the move towards greater transparency in the small business lending space. The emergence of new lending services is putting pressure on existing players to be more open about how much their financing solutions really cost.
This is happening on two fronts:
Simplified interest rates Many lenders are simplifying their sales message by having a clear interest rate, without the complex (and usually hidden) fee add-ons that blow out the cost of the loan. We've become so used to application fees and penalties for early repayment that they feel like a mainstay, but we'd be thrilled to say farewell to them as soon as possible.
Smart matching services It's a tough gig trying to compare the cost, time to funding, complex fee add-ons and product options available. Where do you start? Banks, online lenders, peer-to-peer services, marketplace lenders... While this has been the norm in small business lending for quite some time (mortgage comparison sites, anyone?!), business lending has lagged behind due to the complexity of the financing solutions in this space. Not anymore though - smarter platforms are providing real, meaningful comparisons that help brokers and their customers make sensible recommendations and decisions.
This drive for transparency is a big departure from the traditional model, where you could expect a lower upfront interest rate but still encounter up to $900 in establishment fees, monthly facility fees, draw-down fees, and repayment fees. These fees are difficult enough for trained professionals to comprehend; we're sure there are some brokers out there who have had an interesting time trying to explain these fee structures to their clients!
The reality is that financing arrangements should never be so complex that the customer doesn't fully understand what they're signing up for. We're on a mission to help business owners make smart decisions with their money, and it all begins with understanding.
Greater transparency means that brokers can easily identify competitive offers for their clients, consumers have an easier time narrowing down their options, and lenders are incentivised to offer better deals because they know that their customers will go elsewhere if they don't.
Greater transparency means that brokers and consumers have more power (and we like the sound of that!).
3. Speed to funding
The time from initial research through to settlement can be notoriously slow for small businesses, often taking months. If you asked your client whether they've got months to wait, they'd probably tell you they've never heard anything so outrageous; they've got a business to run! On the other hand, you've also got a reputation to uphold and happy customers are key. With speed to funding on the increase, you'll be able to sleep easier knowing that your customers won't be waiting for months on end.
Ever heard the saying, 'the bigger the ship, the harder it is to turn around'? It's almost as if it was penned to describe traditional lenders. The reality is that many larger institutions want to move quickly, but the way they're setup internally doesn't allow for fast turnaround times. The initial conversation might be very easy, making you want to convey this to the client and raise their spirits. However, the paperwork is lengthy and can cause a lot of stress to the client if they're not prepared to provide identity documents, three-way business performance forecasts, their business plan, P&L statements and a whole host of other records.
As the broker, setting your client up for success with a traditional lender can require a huge time investment (we're talking 20+ hours of your time). That doesn't take into account the time it takes for a credit decision to be reached by the lending institution or the time it takes for an approved loan to land in the customer's account.
Further, some institutions are unable to give you a reason as to why they've turned down an application, making it difficult for you to offer constructive feedback to your client for their next application.
Online lenders and smart business loan marketplaces are implementing time-saving processes, such as linking directly with cloud accounting software, using online application forms and pulling bank statements directly from the web. This goes a long way towards enabling leading lenders to make quick decisions.
At Valiant, we collect a range of data-points on the time it takes to process a loan. Through our transparent online marketplace, we're able to update our lender profiles based on the data we're receiving (rather than relying on claims made by the lender), thereby incentivising lenders to work quickly, stay true to their claims and keep the customer in mind.
We're obsessed with frictionless customer experiences, and a faster turnaround time means a happier customer. Business owners are strapped for time, and what we've learned from speaking to owners every day is that offering lower interest rates won't be sufficient if the lender is unable to save the applicant time and effort. As a broker, faster transactions mean that you can move onto new opportunities faster, without compromising on customer experience: everyone wins.
4. Flexible repayments
Traditional loans often have fixed repayment terms . This means that when you reach the repayment date, you pay the set amount. It sounds simple, but it's a system that inherently favours the lender. A couple of clauses we see regularly are early repayment penalties and renewal fees charged if the client wants a longer term.
These measures discourage businesses from repaying their loans early, rather than paying their debts quickly and demonstrating strong financial management. Modern financial technology platforms have started intervening here, allowing loans to be repaid at the business owner's discretion without incurring fees and charges.
This is made possible by advancements in technology. Penalties, fees, and charges have traditionally been charged because the provider was unable to cost-effectively offer flexibility. These days, flexibility is built into the rates for the product, with new lenders using technology to administrate irregular payments, renewals and early repayment without incurring a large and costly administrative burden on the lender.
A flexible lending environment means less stress for everyone involved.
5. Specialised marketplace lenders
Marketplace lending is where borrowers and lenders are matched via an online platform.
It allows individuals (even total strangers!) to pool assets together in order to lend to a person or business and make a profit. Participants in these platforms can range from 'mum and dad' investors who have excess capital to contribute, right through to large firms who are looking for new 'asset classes' to invest in.
One example of this type of lending is SocietyOne, which works in the personal lending space. There are more and more of these lenders emerging in the business finance space, providing a wider range of options to small business borrowers. As a broker, it can be hard to keep up with these trends as they emerge, while still maximising the time you can spend with your customers.
If you want a quick taster for how these lenders operate, take a look at Bigstone Capital - who target the unsecured space for loans under $250k - and MarketLend who are more of a 'jack of all trades' lender. Alternatively, Timelio operates in the invoice financing space, which can be a great solution for customers with a mismatch in cash flow timing due to unpaid invoices.
Need help getting your head around the small business lending landscape?
Valiant has built a market-leading platform that can support you through the process of advising a small business client. This means that even if small businesses aren't your speciality, you don't have to turn away the client. We can help you make a data-driven, product-agnostic recommendation that is tailored to your client's needs, and start building a loyal client base in the small business sector.
Give us a call today on 1300 780 568.
Jacob leads the Working Capital team at Valiant. He is the go to guru for assisting small business owners with their everyday business finance needs.