A better way to borrow

Fuelling the engine-room of Australia’s economy: it’s time for change in SME lending.

When successful Ballarat hair salon Dexterity Salon needed access to extra capital to support its COVID pivot, the traditional loan options didn’t make business sense. The thriving business had a bumper 2019, and plans to expand their physical footprint were well underway before the global pandemic forced a rapid tactical shift. To acquire inventory for a direct online channel to consumers, they needed funds fast.

When Dexterity’s owner, Jordan Walker, investigated traditional business loans he wasn’t impressed. Banks and other lenders required laborious paperwork, had weeks- or months-long approval processes, high interest rates, inflexible repayment schedules, and wanted a personal guarantee on even relatively modest low-risk loans like the one he was seeking.

Traditional options not right

Jordan’s experience is far from unique. According to Square research, 60 per cent of Australian small-business owners have never accessed any formal funding, like bank loans. The onerous processes around these have seen far more – two in three – rely on high-interest personal credit cards or borrowing money from family or friends. For some business owners – for example, women or people under 40 years old – the figures are even less encouraging.

But competition in this space is increasing after many years of one-way traffic where loans are written at the convenience of banks without addressing the genuine needs of customers.

“Borrowing to fund rapid scaling can be an alternative to taking on investors – one that many small businesses find attractive.”

Jordan was one of the first business owners in Australia to receive access to one of our loans. We are introducing this product to Australia after launching it in the US, where we have supported more than 435,000 small businesses with more than $US8 billion in funding.

We’ve heard first-hand from our sellers that they desperately need a better way to borrow, on fair terms, more quickly than legacy outfits like banks can manage.

Here’s how it should work

When an eligible business such as Jordan’s applies for a loan through us, we make an assessment based on their transaction history with us. When we approve a loan, the funds are there the next business day.

Loans such as this don’t require personal guarantees up to a certain lending limit, and no interest is charged. Instead, such loans involve an agreed single, fixed fee that’s paid off over the life of the loan. Repayments are set at a percentage of daily takings and are repaid automatically through funds the business processes.

Loans that are structured in this way mean that at peak times, such as the Christmas shopping rush when some business owners can afford to pay more, they do. When business is quieter, the repayments are lower.

Why borrow at all?

It isn’t just unforeseen, unprecedented events like COVID that provide borrowing opportunities for business. For many, it’s out of choice, not necessity, when there’s the chance to grow and evolve. Loans, here, are an investment in opportunities.

While it’s true that many businesses had to pivot quickly to online at the same time as managing disrupted cashflow, borrowing to fund expansion can provide small-business owners with the firepower they need to grab market share from rivals, bring new products to market, open high-potential sites or gain a first-mover advantage adjusting to changing circumstances.

Borrowing to fund rapid scaling can be an alternative to taking on investors – one that many small businesses find attractive. Where investors provide capital for expansion, they also take a chunk of equity, and overnight a large part of your business is no longer yours. If your investors bring much-needed expertise and you’re willing to part with sole control of the company, this can be a good thing.

But some small-business owners have a firm desire to own 100 per cent of what they have built. This, too, is an understandable position – after all, it’s the owner’s capital, risk, time and stress that have been poured into building a successful business over many years. For these owners, small-business loans can provide the capital they need while maintaining sole ownership.

Many traditional lenders, however, require personal guarantees on the part of the business owner before they will make a loan. Often this takes the form of a guarantee on the family home. This can be a daunting prospect for a small-business owner. Even if you are very confident in your expansion plans, why would you put your house on the line to receive a loan for a fraction of its value?

Loan competition good for business and the economy

Businesses like Square are fast emerging as an option for those who have found that traditional banks and lenders don’t suit their needs.

We can do some things that traditional lenders can’t do yet. For instance, we can use our existing relationships with small-business owners to get a more detailed picture of how we can work together. This is what lets us make a decision about lending more quickly than others. The fact that we handle business payments processing also means we can scale up and down repayments rather than having the old inflexible approach where repayments are set at a fixed amount no matter what your cashflow looks like.

Competition is ultimately good for everyone. Small-business owners competing against large national or multinational outlets have traditionally been at a disadvantage when it comes to funding. Where big businesses can allocate funds easily, small businesses have faced unappealing hurdles.

With small businesses creating one in every two jobs in the country, having more flexible and obtainable business lending options will help small-business owners scale more quickly, pursue growth opportunities and pivot more rapidly when unexpected events require quick action – just as they did in 2020.

We truly believe that this is the best way for everyone.

This article first appeared in issue 33 of the Inside Small Business quarterly magazine