Just about everyone has been taken aback by the extent of misconduct in consumer lending practices and financial advice which have been uncovered to date by the royal commission into Australia’s financial services sector. Next month the commission turns its attention to the SME sector and we can expect to hear more horror stories then.
But while it still has some time to run, it’s not too early to consider how the fallout from the royal commission will affect SMEs.
Borrowing from a bank
It will become even harder for SMEs to get credit as banks become more risk averse in order to avoid further trouble with government, regulators and the general public.
Another consequence is that it may take even longer to get a decision from a bank. Not knowing whether the bank will give you a ‘yes’ or a ‘no’ creates pressure and uncertainty that can lead to poor decision making or missed opportunities.
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In addition, the cost of accessing banking services will come under pressure as banks seek to maintain earnings while their businesses shrink. Fees and margins are likely to creep up as the banks try to maintain their earnings.
The banks are going to get smaller by their own volition, imposition from on high and market forces. As new players evolve, banks will become less relevant but we need to better understand who and what will replace them. Whatever you think of banks, it may well be that the grass is no greener on the other side.
If you use a broker to help you source finance, be prepared for changes here too.
Like bank staff, the vast majority of brokers are good people who want to do the right thing by their clients. However, being paid by the lender and not their client creates the potential for conflicts of interest.
The relationships between banks and brokers will change. Banks will look to reduce upfront and ongoing commissions paid, which will impact on the profitability of brokers. Some will leave the industry while others will modify their business model, perhaps on a fixed fee for service basis. In the future we are likely to see brokers more involved in negotiating fees like establishment fees.
The current and alternative government will do the banks no favours. At the same time, they will look to boost competition by making it easier for new entrants like fintechs, challenger banks and specialist asset financiers to get up and running.
But a note of caution: while the banks’ self inflicted reputational damage affords non-bank lenders the opportunity to gain market share by taking the high moral ground, you shouldn’t assume that the banks are all “bad guys” and therefore any challenger to the banks is necessarily a “good guy”.
Some non-bank financiers would fare no better if they faced the same level of scrutiny the banks are currently receiving. For example, non-bank SME lenders tend to be less transparent than the big banks when it comes to fees and charges.
What should SMES do?
The good news is that more and more financing options are becoming available to SMEs. No longer is it a matter of having little choice outside of the big four bank oligopoly. The challenge is to be able to make sense of all the offerings in the SME finance space. Perhaps the best way to do this is to try one of these alternative financiers when an opportunity or need arises.
For those SMEs that rely on debt to finance and grow their business, it is important to invest the time to explore what options are available and what best suits your situation. Bank and non-bank lenders have some useful tools and tips but if you’re looking for something totally independent, check out the government website.
And in the next couple of months Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, and theBankDoctor.org will be releasing a guide to help SMEs assess whether borrowing from a fintech is the right option for them.