Considering the small business sector employs nearly half the national workforce and contributes around $380 billion to Australia’s GDP [1], it’s easy to see why it’s frequently referred to as the ‘engine room’ of the economy.
Like all engine rooms, the sector requires sufficient fuel – in this case, working and growth capital – to not only keep running but also accelerate. However, poor access to capital remains a significant barrier to small businesses, accounting for a majority of failures in the sector.
Part of the reason is that banks are reluctant to lend to small businesses in circumstances where the borrower doesn’t have bricks-and-mortar security – especially if a short-term loan is sought. As Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), has previously told Dynamic Business, it is simply more profitable for banks to lend against properties than it is for them to approve an unsecured loan against strong business cases and healthy cash flows [2].
Compounding this issue is the fact that banks want borrowers to have a strong track record of meeting financial obligations whereas new businesses owners are unlikely to have proof of earnings or an established credit history demonstrating a good credit score. Relevantly, even if a small business has a track record of paying its bills on time, their loan application could be rejected if the owner’s personal finance history isn’t spotless.
Moreover, bank loan approval processes are often drawn out over weeks, with a requirement for the borrower to not only fill out onerous forms but present a business plan setting out the intended purpose of the funds sought. These hurdles can make it difficult for a small business to urgently access money required to remain solvent during a tough trading period or capitalise on a great opportunity for growth.
Fortunately, the emergence of credible non-bank lenders with largely favourable reviews (a far cry from the loan sharks of yesteryear) has provided a lifeline to small business owners, especially those seeking a short-term loan (i.e. a few months to a maximum of three years).
Using sophisticated algorithms, these lenders are able to process loan applications submitted online within as little as 24 hours, meaning it is possible for small businesses to apply for an unsecured loan with minimal paperwork and no securities and have it approved on the same business day. Further, whereas loan repayment schedules are not always clear with banks, non-bank lenders tend to favour clear schedules with no hidden fees or early repayment fines.
Of course, ‘there’s no such thing as a free lunch’, with the key trade-off for the convenience afforded by non-bank lenders being higher interest rates than banks, particularly if the business has a bad credit score. Further, alternative lenders tend to loan small amounts relative to the business’s revenues (e.g. up to one month of revenues in financing) and they impose strict minimum requirements (a credit core make factor into their assessment but it’s not the only determining factor).
So, when should a business owner seek finance from a bank and when would it be better to approach a non-bank lender? The owner of an established business with the necessary securities, such as residential and commercial property and land, would be better off seeking a lower interest bank loan, particularly if they are across the necessary paperwork and their plans for the loan are not time sensitive. Conversely, a business owner who requires short-term finance urgently but is unable to secure a loan form the bank (e.g. a lack of securities, a poor credit rating) would be better served by approaching a non-bank lender.
In either case, it is prudent for the business owner to proceed with a loan only if they are certain they absolutely need to borrow money and can meet the terms of the repayment schedule – after all, if a business owner defaults on a loan, this will jeopardise the business and the effects could be felt in the owner’s personal life. The best course of action for a business owner might even be to apply for one of 74 different small business grants now available through the state and federal governments.
To avoid making rash decisions, it is important for business owners to conduct extensive research into the available loan options. This might involve using sites like Small Business Loans Australia, which boasts a repayment calculator, a lender comparison tool and detailed reviews of non-bank lenders like Capify and Prospa. These resources are useful for helping a business owner determine not only their eligibility for unsecured loans but the best non-bank lender for their needs.
Ultimately, choosing between a bank and a non-bank lender (or even electing to forego a loan altogether) will depend on the particular financial circumstances and requirements of the small business in question. After all, different engines require different fuel.
[1] http://mfm.ministers.treasury.gov.au/media-release/086-2017/
