SMEs rejected by banks turn to family and friends for funding

rejected funding, credit licenses

New research has revealed that SMEs experience a high rejection rate with traditional lenders when it comes to securing business finance, with research by online SME lender OnDeck Australia revealing that of the 40 per cent of SMEs that have applied for finance, 24 per cent have had their application rejected by a bank. This figure rises to 38 per cent in the case of SMEs that have been in operation for less than five years.

Many of those SMEs knocked back for “traditional” bank loans reach out for alternate sources of finance – typically family and friends (42 per cent), or credit card (32 per cent). Another 29 per cent partner with an online lender, with only 13 per cent deciding to give up seeking funding altogether.

“When SMEs are knocked back by a traditional lender for commercial finance, it can seem like an easy option to rely on family and friends as a source of funding,” Cameron Poolman, CEO of OnDeck, Australia said. “But money and mates have the potential to be an ‘oil and water’ mix – and in the current pandemic, options to borrow from personal contacts could be limited.

“Even where friends or family are willing to provide funding, without clear terms and conditions in place, misunderstandings can easily occur,” Poolman added. “This can cost the SME owner a valuable personal relationship. In the worst-case scenario, disagreements can escalate to the point where the parties become embroiled in costly legal action.”

OnDeck’s study also found that 36 per cent of SMEs recognise there are now more lending options available to their business, up from 30 per cent in 2018.

“It’s great to see that Australia’s small business community is becoming aware of specialist SME lenders…This is giving more businesses the opportunity to access the funds they need to navigate the current challenging conditions – or to take advantage of the upscaled and extended instant asset write-off and invest for future growth,” Poolman said.

“One of the key benefits of online lenders…is that SMEs can enjoy rapid loan approval times, often with funding available in between one and three business days. This lets SME owners access finance in a timely manner to take advantage of opportunities as they arise.”