Fintech solutions

A new way of funding small business.

In the words of the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, “The overwhelming feedback from the small-business community is that a lack of access to funding is their biggest barrier to growth”. It would seem the big banks aren’t meeting the requirements of SMEs, with the Australian Banking Association acknowledging that small-business loan applications have fallen by 33 per cent since 2014. So where can small-business owners turn to for loans that don’t threaten their sustainability? We spoke to Bill Baker, co-founder and CEO of Lend, about the opportunities fintech is providing, and how this alternative funding model works.

ISB: What are the key drivers you predict in SMEs turning to non-bank lenders to fund their growth in the near future?

BB: It is no secret that small businesses are under increasing cash flow pressure – from customers spending less and rising overheads to stricter lending requirements imposed by traditional lenders in the post-Royal Commission environment.

The difficulty for small businesses to obtain funding from traditional lenders has been well documented. For SMEs in the growth stage that don’t have security or strong cash flow, options for getting finance, outside of funding their own business growth or asking family members and friends to chip in, is limited. In fact, when growing Lend, my business partner and I went through a similar experience.

We are seeing rapid growth in the non-bank sector servicing SMEs in Australia, which has long been recognised as an area that is underserviced and ignored by traditional funding providers. Increasingly, we are also seeing SMEs seek out alternative funding arrangements from non-bank lenders to avoid using property security against new or refinanced loans. We expect this trend to continue in future if traditional lenders don’t consider more innovative ways to finance SMEs that go beyond putting property up as security.

“Having technology in place that leverages AI can dramatically reduce the inefficiency and time brokers spend placing an SME client with a lender.”

Securing a traditional business loan can be a long and drawn out process. Going through traditional channels for a business loan could take up to 60 days before you get approved, unless you have tangible assets. Alternatively, seeking finance through a non-bank lender could see the funds turned around within just 24 hours. Most small-business owners are time-poor and focused on driving their business forward so, for many SMEs, tighter turnaround times are another appealing attribute of non-banks.

ISB: How important a role do you see brokers playing in this transformation in SME lending?

For small-business owners, most of their time and energy goes to running their business, which means they might not be aware of the different funding opportunities on offer. And even if they are aware of the different options, knowing which one is right for them can be a minefield given the hundreds of different lenders and products out there in the marketplace.

More importantly, small-business owners don’t want their credit profile negatively affected so early on if they have to engage with multiple lenders, so many shy away from trying to obtain funding themselves.

This presents an opportunity for brokers, who can play a critical role in removing the burden and confusion for small business owners and getting the right funding. The role we see brokers playing in this transformed landscape is moving beyond a transactional role to becoming a key trusted adviser or business partner.

Brokers should know how to have the right conversations with their business clients to delve into the “nitty gritty” of their business, its strategy and objectives. This might involve looking for a solution that is outside a traditional bank loan or building one that combines different products and services.

In saying this, there is an onus on brokers to educate themselves – from reading a business strategy and interpreting financial statements to understanding all the different options in the market in order to bring the right funding solution to the client.

ISB: What are the biggest barriers brokers currently experience in providing the best service to their SME clients and finding them the best loans?

BB: We believe the biggest hindrance for brokers is that they are unable to shop their client around with different lenders without potentially affecting their credit score. It is likely that each time a lender does an enquiry on a client, a mark goes onto that client’s profile. This can severely inhibit the broker’s ability to find a tailored solution to the client’s specific needs.

While there are many as 50 non-bank lenders in the marketplace, some brokers choose to align with one or two lenders. This may be because they don’t have the volume to go across several lenders. In this case, brokers are limited in terms of the loan solutions they can bring to the table for their business clients. The same can be said for brokers who have limited knowledge on the different products and lenders at play in the market.

ISB: And how do you see technology, especially AI, helping brokers offer a better service?

In Australia, we estimate as many as 12,000 brokers are working around the inefficiencies that currently permeate the SME finance market. While paper trails aren’t as common within the broking industry, the process of obtaining a loan is still very much hands-on, manual and inefficient.

In fact, we estimate the average broker could spend up to 35 hours to place an SME client with a suitable unsecured lender – from numerous phone calls with lenders and workshopping scenarios to credit policy research and, of course, plenty of waiting around for an answer. In addition to this, lenders are regularly changing their credit policies around income, expenses and benchmarking in the aftermath of the Royal Commission and numerous other regulatory reviews.

These current inefficiencies at play in the SME lending market make a compelling case for brokers to onboard more technology-driven solutions. Having technology in place that leverages AI can dramatically reduce the inefficiency and time brokers spend placing an SME client with a lender. For clients, this means a more streamlined service experience where they get their answer more quickly. Another benefit is that brokers will be empowered to engage with multiple lenders instead of just those they are aligned with, ensuring the client is provided the best possible solution for their needs.

Our platform, for example, uses a combination of AI and complex algorithms to build a customer profile based on what information is provided, and runs this across 15 technologically-enabled lenders and products to identify the most suitable solution based on business characteristics and serviceability requirements.

This story first appeared in issue 27 of the Inside Small Business quarterly magazine.