Why the big banks grip on small business loans is loosening

Cash is king. Nowhere more so than in small business – it enables the purchasing of stock, paying of staff and contractors or even paying debts. It also enables small businesses to invest in new opportunities or innovate – but cash for these businesses can be a little bit chicken and egg. Which comes first?

Comparison of business loan options

It won’t be a surprise then, to know the Australian Bureau of Statistics says access to finance is the single most common barrier to growth and innovation. Not only that, according to Judo Banks 2019 SME Insights Report there’s a $90B funding gap between what Aussie businesses are seeking versus what they are getting. So why is access to small business loans so hard for so many?

Tighter Lending Criteria and Tighter Purse Strings

The answer lies in a few different factors. Government Regulation and complexity in documentation both put up giant roadblocks in front of Aussie small businesses.

Over the past couple of years, The Royal Commission into Banking made recommendations into lending criteria to ease household loan pressure and reduce the risk of loan defaults. This triggered unintended consequences with ‘heightened risk aversion’ a mainstay in the banking sector and flowing on to the small business sector.

Indeed according to Small Business Ombudsman Chief, Kate Carnell, her organisation has been saying for a long time that “since the royal commission the banks have been using consumer responsible lending criteria for small business, it is not appropriate or relevant,” she said. “There is no point asking small businesses for fortnightly payslips or what they spend on takeaway and Netflix.”

So, what’s being done to change things? Acknowledging the flow-on effect to small businesses, back in November 2019, Federal Treasurer Josh Frydenburg provided clarity to ASIC, telling banks to waive responsible lending standards for small businesses. The full effects of these loosened lending criteria are still to be fully felt, meaning Australian small businesses are turning to alternative solutions to boost their cashflow.

 

The Rise of Non-Bank Lenders

This shift has become more pronounced than many may have expected, the big banks saw their slice of the market slide down to 67% last year, a drop of 10% – while non-bank lenders grew their share to 33% according to the inaugural Business Lending Index Report commissioned by aggregator, FAST.

So, what’s triggered this growth? We see three key reasons why small and medium-sized businesses are turning to non-bank lenders for their small business loan needs.

They’re looking at more than just credit. This is the single biggest factor, with such tight controls on lending, the big banks are looking to the fine details when assessing a business for a loan. Echoing Kate Carnell’s sentiment, looking at what they spend on takeaway and Netflix simply isn’t relevant. Which is where the smaller lenders come into their own – secured small business loans. Being able to assess a business’s capacity to borrow and repay a loan based on security as well as more traditional measures makes it not only much easier to offer a loan, but to fund it faster.

They’re more nimble and dynamic. Some business opportunities are extremely time-sensitive and simply can’t wait for the traditional turnaround of a bank. Complex documentation, expense reports, and personal security documentation not only take time but are prone to the inevitable human error which all adds to the time needed to fund a loan. Time which often isn’t in abundance. Smaller lenders are able to follow their own streamlined process to help businesses in as little as 24 hours in some cases.

They’re more accessible. This has never been more apparent than during the current pandemic. As we mentioned before, speed is of the essence in many small business loan transactions, and many business owners, who are everyday people, want access to someone to discuss their options and get the all-important advice they need. In fact, according to Judo Banks SME Insights Report – trust in traditional banks sits at a measly 2/10. Conversely, here at Strive Financial for example, you’ll always deal with a small agile team. This gives the lender, borrowers and brokers comfort and opens up a transparent relationship which is just good business for everyone.

There are over 2.1 million small and medium businesses in Australia. Each and every one of them has their own financial needs. While there is plenty of work to be done by the big banks to speed up their processes and provide more flexibility – it’s reassuring to know Australian Businesses have alternative business loan solutions to meet their individual needs, whatever they are.

Sources:

  • “Holding back the economy”: What’s causing the SME credit drought? – SmartCompany 
  • Non-banks double business lending share as majors slide – AFR 
  • SME Banking Insights Annual Report 2019 – Judobank
  • Business leaders warn against tighter lending standards in wake of banking royal commission – ABC News
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Posted 15 July 2020
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