The Changing Landscape of Small Business Loans in Australia 2017
Sooner or later, most small business owners decide to seek finance. In fact, there are more than two million SMEs in Australia, and only 30% are completely free of debt.
There are many reasons why you may choose to take out a loan for your business, but they mostly fall into one of these categories:
Stabilising cash flow
The single biggest challenge that most small businesses face in the early years is fluctuations in cash flow. A late paying client, seasonal sales, too many bills at the same time – it’s all too easy for a business that’s profitable on paper to go down because of poor liquidity. A loan or borrowing facility can help you to stay on your feet through the ups and downs until you build some reserves.
Giving your resources a boost might bring you new opportunities to generate revenue. A business loan can enable you to hire more staff, buy stock in bulk, purchase plant or equipment, move to bigger premises or advertise your business to new markets – or even make a strategic acquisition of a competitor, customer, or supplier.
Financing is crucial to the survival and growth of many SMEs – but that doesn’t mean it’s easy to come by – in fact, 89% of small business owners in Australia believe business finance is inaccessible, despite the key role SMEs play in our economy.
The bank loan challenge
The traditional source of finance is the high-street bank – but the unfortunate fact is that very few SMEs meet the banks’ criteria for business lending.
Basically, banks want two things:
- To get their money back on time
- To make a return on their investment (i.e. the interest and fees you pay)
Anything about your application that represents risk over security i.e. suggests that you might not be able to meet your repayment obligations will probably get the door slammed in your face.
In case you’re wondering, the number one reason small businesses get turned down for a loan is lack of collateral – banks are big on security, especially for long-term financing, and many small businesses simply don’t have assets to offer against the loan.
But there’s a long list of other reasons your application might be rejected, including lack of trading history, insufficient or fluctuating income, existing debts, or the declining state of your industry.
The rise of alternative finance providers
Weigh the urgent need for business finance against the difficulties SMEs face in securing a loan, and it’s easy to see why there’s a thriving alternative loan market in Australia.
An ever-growing number of online ‘fintech’ lenders are offering quick, easy access to cash – at a price, of course. In exchange for the promise of higher returns, these lenders are prepared to take a risk on businesses that have no hope of being approved by the big banks.
Alternative options are available, if business owners are prepared to pay higher fees and interest rates, in order to access the funding they need. But there’s more to it, increasingly small businesses are turning to fintech lenders: they offer several other advantages over the big banks.
- Simplicity. Applying for a bank loan is a tedious process. You’ll need to gather a wealth of background information, including a detailed business plan, cash flow projections, and several years’ worth of financials to support your application. Online lenders tend to have much more modest requirements, and may only need to see ID documents and bank statements for the last 6 months.
- Speed. Banks take ages to evaluate loan applications – anything from weeks to months. But an application to an online lender could be approved within hours, and the funds in your bank within a day or two – which might mean the difference between seizing a game-changing opportunity, and missing out to competitor.
- Flexibility. Depending on the type of finance you’re applying for, there’s a good chance you’ll be able to structure repayments to suit your cash flow. For example, a merchant cash advance can be repaid as a percentage of your sales, so you wont have to worry about not making fixed repayments if your income drops temporarily.
Of course, there are drawbacks to alternative financing, too (in addition to the cost). Among other things you may need to provide a personal guarantee of the loan in case your business can’t make its repayments, and some providers may seek to impose restrictive provisions on your business as a condition of the loan.
If your business isn’t likely to meet the big banks requirements – or you just don’t want the hassle – alternative business finance could be just what you need. But it’s vital that you research your options and understand the pros and cons of each lender and product before you lock yourself in to a loan.
A good place to start is a comprehensive guide to the alternative finance market, like this one: Small Business Loans: The Definitive Guide + How To Get One. It’s also wise to seek professional financial advice, to help you choose the most suitable finance option for your specific circumstances.
About the Author:
Sarah Miller writes about Small Business and Finance.