By Neil Slonim
The Scottish Pacific SME Growth Index highlights two significant trends in how SMEs are financing their businesses.
Firstly, the big four bank stranglehold on the SME segment is loosening with non-bank lenders starting to make inroads. Of the businesses surveyed by Scottish Pacific, 32.1% of SMEs borrow directly from their main relationship bank, down from 38.6% last year. In comparison, non-bank lending demand has risen from 13.6% of SMEs to 16.4%.
Going hand-in-hand with this is the preference among SMEs for unsecured credit, where there is no requirement to put the family home up as security. One of the major attractions of non-bank lenders, be they debtor financiers, asset based lenders or marketplace lenders, is they generally do not insist on real estate security. Nearly seven in 10 SMEs are willing to pay a higher rate of interest to obtain finance if it means they don’t have to provide real estate security.
Other reasons why SMEs are finding non-bank lenders attractive include fewer loan conditions and covenants, the ability to talk to people and faster decision making.
These are encouraging trends for non-bank lenders, although they still face obstacles in making serious in-roads into the dominant market share of the big banks. High on this list of obstacles are inertia and awareness.
SMEs do not proactively manage their financing arrangements. The survey found fewer than 5% of SMEs keep an active eye out for the credit facilities that best suit their business. There are a number of reasons for this, not the least is SMEs just don’t have the time. Others factors include the difficulty in being able to differentiate between the wide range of options, a perception that all lenders are pretty much the same anyway and the difficulty in sourcing expert, independent and affordable advice.
The other major obstacle is awareness, which is a challenge for non-bank lenders but especially the new marketplace lenders. The inaugural Banjo Small Business Survey released last month by Banjo Loans, an online unsecured SME lender, revealed only 16% of SMEs are aware of marketplace lenders and only 3% used one in 2015.
“Too many SMEs rely on cash flow and family debt and don’t apply for funds from traditional lenders because there are still too many hoops to jump through when applying for traditional finance,” said Andrew Colliver, an ex-senior NAB banker and now chief executive of Banjo Loans.
This is borne out in the Scottish Pacific survey, which found two thirds of SMEs either regularly or occasionally draw upon personal finance facilities such as their own credit card to support business expenditure. What is telling is 17% of SMEs regularly swipe their own card to cover funding shortfalls at exceedingly high consumer credit rates above 20%, while one in two SMEs occasionally support their own business using personal finance facilities. Scottish Pacific CEO Mr Peter Langham said these findings “posed significant concerns because there are better funding options available to help SMEs grow”.
With the value of the SME lending market standing at around $250 billion, there is plenty of room for both the banks and the non-bank lenders. As SMEs become more aware and comfortable in dealing with non-bank lenders these players should enjoy significant growth. The growth of the non-bank lenders will also be heavily influenced by how quickly and well the banks respond to the challenge. But for those SMEs who don’t mind putting their house up as security and who want the lowest rate the bank is always going to be the place to go.
Note: Scottish Pacific, which recently acquired its major competitor Bibby, is Australia’s biggest non-bank debtor and trade financier. It commissions research company East & Partners to conduct this annual survey of over 1250 Australian SMEs with turnover between $1 million and $20 million