Why Non-Bank Finance is Leading the Way in Small Business Funding
In 2016 it as reported that by 2020 Australia's alternative lending sector would be mainstream. Today in 2020, it is fair to say that this prediction has come to fruition with Australian small to medium enterprises (SMEs) more likely to use non-bank financiers to funds their business growth.
This reflects the significant change that Australia's lending landscape has undertaken over the past few years. However, the rise of alternative finance as a mainstream option doesn't stop here. An overwhelming 83 per cent of small business owners surveyed stated that they planned on using their own funds to fuel revenue growth. This aligns with research that found many business owners don’t fully understand the process and benefits of non-bank funding, suggesting there is more work to be done in educating consumers about their options.
Change a long time in the making
The banks have long held a prominent position within Australia's lending landscape, with the big four raking in a profit pool of $30 billion annually. Competing with these legacy brands is tough, but over the past five years, Australians have begun to broaden their financial horizons.
While the recent Banking Royal Commission may seem like a trigger for this shift away from traditional lenders. FAST Group CEO Brendan Wright notes that this trend was well underway before the Commission, beginning four to five years earlier.
There is no doubt that finance is still a major thorn in the side of aspiring small business owners, with 60 per cent stating that access to money has stifled their plans of small business ownership, according to the Australian Banking Association. What has changed in the way in which consumers are going about solving this problem?
In 2019 the total loan value of Australia's major banks declined 12.5 per cent. This isn't due to a drop in the amount of finance being sought; however, as non-bank lenders, total loan value jumped an outstanding 42.4 per cent. This suggests that alternative lenders 11 per cent slice of the market will continue to grow, potentially giving the banks a run for their money.
The appeal of alternative lending
Banks step back
When we look at the reasoning behind this shift away from traditional lenders, and towards non-bank options, there are a wealth of factors at play. However, one reason is becoming increasingly common; people's desire to avoid putting their property up as security.
Interesting, 21.3 per cent of SMEs stated that this was the reason that they looked elsewhere for their finance, which is more than in 2018 survey results. This suggests that the security requirements of traditional lenders are a growing problem. Additionally, other notable reasons included reduced compliance paperwork which was mentioned by 19.8 per cent of applications, and short applications times at 17.1 per cent.
While the flexibility in security requirements and simplified application processes are major selling points for non-bank lenders, there is more than just 'pull' forces driving this change in consumers behaviour. The banks' disclosures during the Banking Royal Commission and reduced credit appetite are significant 'push' factors driving consumers to look elsewhere according to survey results.
One in every four SMEs have their finance applications rejected by the bank, and once this happens, business owners are unlikely to return. An AltFi report found that the time taken to access finance with traditional lenders had a negative effect on 29 per cent of SMEs, even if they were eventually successful. For those who weren't able to secure funds, the number is higher at 65 per cent of applicants.
Experience is key
In addition to the tightening of lending conditions among the big banks, the overall customer experience is a significant consideration for many small business owners. While in the past consumers displayed enduring brand loyalty towards their banks, the diversification of the market has highlighted to many that they have options. As a result, consumers are taking the liberty to explore the range of lenders available to them, and many are finding that the customer experience at the banks doesn't stack up.
An outstanding 90 per cent of SMEs surveyed by Banjo stated they preferred their experience with alternative lenders to that of banks. This can largely be attributed to a shift away from relationship-based lending among Australia’s traditional finance institutions. Significant downsizing and restructuring efforts meant that efforts to maintain long-term relationships with small business owners were somewhat left behind.
It is not just the end consumer that is making a move towards alternative finance, with Australia's broker network beginning to favour non-bank lenders. Sentiment among brokers is that the investment by alternative providers in technology has made the application process smoother, while assists in managing large workloads. Further, non-bank lenders have received praise for their ability to handle unique cases that don't fit into the cookie-cutter approach of the big four, tackling variables such as seasonal income.
Overcoming new challenges
Non-bank lenders have always played an important role in bridging the gap between the offerings of traditional financial institutions and the unique needs of small business owners. However, there is a growing barrier to finance among Australian SMEs, the volatile property market.
The Australian Bureau of Statistics found that one in three Australians don't own a home, and for those that do tumultuous market conditions are impacting property prices. This means that applicants have less equity to source when trying to secure finance and the bank's insistence on SMEs offering property as security is becoming increasingly unrealistic and restricting.
This is creating a challenge for the 60 per cent of small business owners who are seeking funds in order to take advantage of their strong growth projections. So much so that according to the SME Growth Index, 91 per cent said they would be willing to compromise on a higher interest rate to avoid using their home as security. Many non-bank lenders are embracing the trends towards securing against business assets rather than personal property assets, which many banks are resisting.
Awareness and education
Despite the number of non-bank lenders available in the Australian market, the concept is still faced with apprehension by many small business owners. Awareness and understanding are significant barriers to growth in the use of non-bank lenders. This is simply because Australia's finance industry has been dominated by the big four, leaving little room for smaller independent lenders to build the same comfort and trust levels that the banks hold.
Despite the fact that only two in 10 SMEs that apply for bank funding are successful, according to Banjo, research shows that only six per cent of rejected applications turn to non-bank lenders. This suggests that there is a need for further education within the sector about alternative finance in order to remove pre-conceptions or stigmas.