1. The traditional business banking relationship model is failing SMEs
The old model is simply no longer viable for either SME customers or their banks. One of its major shortcomings is its dependence on real estate security, but demographics, business models and attitudes have changed. Housing unaffordability is causing the demise of the 'Great Australian Dream,' and the business owners who have property with some level of equity are less inclined to put it at risk, based on the view that their business should stack up on its own.
In addition, impositions by regulators, such as the need for more capital and changing risk weightings, together with the cost of IT systems, labour and premises, make it prohibitive for banks to provide the personal service SMEs are looking for.
What this means is that any small business with the following characteristics will find it difficult to attract support from a major bank:
- Borrowing needs are less than $250k
- Don't have, or are not able to, offer property as security
- The funds are needed within a relatively short period of time (less than 4 weeks)
- The business has only been operating for a short period of time (less than 2 years)
- It does not have a 'clean' credit history
2. But don't despair, there are alternatives to the big banks
Just because the big four banks, plus their subsidiaries like St George, Bank of Melbourne, Bankwest etc. control close to 90 percent of the market, it doesn’t mean that SMEs have no other options. We keep hearing for calls for greater competition in SME lending, but in reality the competitors are already out there, it’s just that SMEs and their advisors have a low level of awareness of their existence and capabilities.
There are dozens of non-bank SME lenders operating in Australia and these can be categorized into equipment, property, working capital or debtors as per the table below:
3. Online SME lenders are filling the gap
The inability or unwillingness of the banks to service SMEs, especially those that fit into the categories listed above, has created a gap that is being filled by a number of customer focused entrepreneurs, who use technology to offer a quick and user friendly borrowing experience.
The Australian SME Lending market is estimated to be around $250b. In 2015, online lending accounted for 1 per cent of this split- evenly between debtor financiers and working capital lenders.
In the US & UK, where SME online lending has been going for several years, the market share is more like 10%-15%. As the banks continue to under-service the lower end of the SME market, the slack will be picked up by the online lenders.
4. This will create both challenges and opportunities for accountants
Most accountants are already aware that the banks are tightening up on SME lending and at some point the question will arise “what about the online lenders?”
Early adaptor accountants are already onto this. They have researched the options and feel confident in advising clients on the most suitable offerings. Some of them have even entered into introducer or partner arrangements that involve the payment of commissions for introductions. Commission rates vary considerably from 0% to as much as 4%, and sometimes even more. Whilst this could become a useful income stream for accountants, caution should be exercised when looking at aligning with lenders- just because they offer the highest incentives.
Some accountants have established a debt advisory capability that is offered to clients on a fee-for-service basis. This avoids any potential conflict that could arise under brokerage arrangements.
These days we don't see much in the way of the“tripartite relationship,” which was once common between the local accountant, bank manager and their small business client. But the online lenders are similar to their SME target market in that they are relatively small, don't have long track records and need to produce win/win outcomes to survive and prosper. So there is every chance that the old tripartite relationship can be re-established, it’s just that the lender may not be a bank.
5. Online lenders can offer a Plan B to avert a “cash crisis”
Juggling competing interests to stay cash positive is a constant battle that consumes so much time and effort. Big companies are increasingly using SMEs to fund their own working capital needs. For instance, Kelloggs and Fonterra recently announced they were extending their payment terms from 90 days to 120 days.
According to Marketlend, Australian suppliers are the slowest in the western world, and Dun & Bradstreet research revealed 38 per cent of businesses had a customer or supplier, either go broke, or was unable to pay in the last 12 months. Adverse events like this can quickly trigger a cash crisis, and we’ve all heard stories of businesses that have not been able to get bank support in times of need. It's the old “bank and the umbrella adage”.
Every SME should have a Plan B in the event their bank is not prepared to support them in a cash crisis. A Plan B of “go to another bank” doesn’t make a whole lot of sense, because if one bank is not prepared to offer support, it's unlikely that any other bank would act differently.
This is where an online lender could come to the fore with their ability to make quick decisions and provide funding on an unsecured basis. It is best to learn about this when you have no immediate need.
6. Pricing is perhaps the biggest concern with online lenders
The range of pricing between online lenders can be significant. I have seen loan agreements with an all-up cost of finance ranging from around 14% pa. (there are some very fair rates out there) to well in excess of 100% pa. You need to have a very good business to make a profit whilst borrowing at these rates.
Let’s be clear on this - banks should always be cheaper than online lenders, but if the bank won't lend then there is nothing to compare. Bear in mind too that most of the online lenders do not require security.
The online lending market is already crowded with more than 25 operators, all with remarkably similar websites offering quick and easy solutions to the financing needs of small business owners. But with some of the lenders, it’s not easy for a borrower to readily answer three simple, yet critical, questions:
- Is this the best product for my needs?
- How much is it really going to cost me?
- Could I get a better deal elsewhere?
Accountants have an important role to play here because they are usually better placed than their SME clients to make sense of all this.
7. The more a business applies for credit, the harder it becomes to get it
Many SMEs don't understand the implication of shopping around for credit, but online lenders put a high weighting on the number of times a borrower has applied for credit on the assumption that the more applications made, the more likely the chance of a default. What many SMEs don't appreciate is that every time they apply for credit, even for innocuous financing arrangements like leasing a new vehicle, this is recorded regardless of whether they proceed with the borrowing.
8. A broker can protect reputations and save time and money
No SME wants to get a reputation as a 'credit shopper'. One way to avoid this is to use a broker who is well positioned to narrow down the options. Just as there are online lenders, there are also online brokers that can help determine which lenders are the best fit for the business. However, remember that brokers receive income from the parties they refer loans to, as discussed above.
9. Technology is an opportunity, not a threat
There seems to be a widespread acceptance that cloud accounting represents an opportunity, rather than a threat, to the role of the accountant. Technology is only a threat to those who fail to embrace it.
Online lenders place a great deal of reliance on the data contained in cloud systems offered by suppliers like Xero, Reckon and MYOB. But sometimes there is a need to talk to the accountant about the accounts and this is where that tripartite relationship becomes so important.
Online lenders will play an increasingly significant role in funding Australian SMEs.
The industry offers great potential and opportunity for SMEs, but it is still early days and borrowing from, and dealing with, an online lender is quite different from dealing with the bank.
Accountants have a critical role to play in building their clients’ awareness and understanding of this new form of alternative business finance.
In turn, this can create opportunities for accountants to develop new income streams, whilst helping their clients grow profitably and safely.
Neil Slonim FCPA is founder of theBankDoctor.org, a Not-for-Profit online centre that helps small business owners deal with the challenges of funding their business. theBankDoctor's blog was named by SmartCompany as one of Australia’s best business blogs in 2016.
Valiant Finance is Australia's trusted business loan marketplace. By dynamically matching business loan seekers to the credit criteria of over 35+ leading Australian lenders, Valiant significantly reduces the time and energy to fund, whist increasing loan approvals.
Andrew is the Head of Third Party Distribution at Valiant Finance. He and has vast experience in finance, working with brokers, accountants and referral partners.