There are opportunities for the right borrowers even if they don’t meet ‘ideal’ lending criteria – being declined by a bank is no reason to give up.
Small business accounts for 97% of all businesses in Australia, employs 70% of the workforce and contributes more than half a trillion dollars to the economy, yet remains the poor cousin when it comes to securing finance.
Statistics like these demonstrate that small business and self-employed people should be the most powerful economic voice in Australia because they truly are the engine room of our economy.
Over 2.4 million Australians are self-employed, 1.4 million of these are sole traders and the remaining 1 million employ 6 million people. According to a report by the World Bank and International Finance Corporation, Australia is ranked as the second easiest country to start a business, after New Zealand, and yet more than 60% of small businesses fail within the first three years of operation.
Starting a new business is fraught with risks of all types, but there’s no question that it is next to impossible to succeed without access to affordable capital. And most small and medium sized enterprises say that availability and conditions of credit are key barriers to their business growth.
When you add to that a previous business or credit failure – which is not uncommon for business entrepreneurs – then they are facing a massive hurdle.
According to figures released by APRA, the big four banks are continuing to tighten their mortgage underwriting standards across the board. But even more telling for small business is the fact that so-called ‘low doc’ loans have declined from 6.4% of new residential loans in 2010 to just over 0.7%, following the introduction of the National Consumer Credit Protection Act in 2009.
We would be the first to agree that in some cases, and for some lenders, ‘low doc’ loans were based on poor lending practices and the fact that these have been stamped out is a very good thing.
But it may be that the pendulum has swung back too far. For many small businesses and sole traders, the requirements imposed by mainstream lenders for ‘traditional’ loans are impossible for self-employed or small business owners to meet.
Two thirds – 65% – of small-business owners put themselves in a potentially precarious position by using their personal finance facilities to fund their growth, including credit cards, where interest rates can be over 20%.
And another common approach, using home equity to support a small business, is completely cut off when business operators can’t access a mortgage in the first instance.
The many business owners who may have had some type of financial problem in the past find themselves in a very difficult situation when it comes to securing finance. A previously failed business or a bad credit rating will, in most cases, result in an automatic rejection from a mainstream lender. This can be the kiss of death for many Australians trying to make a go of it as a sole trader or start a small business.
There are options outside of the mainstream banks. In fact, non-banks make up a growing segment of the loan market. Small-business owners should not hesitate to seek help from a specialist lender and/or broker with experience in this area.
Ask your broker whether they work regularly with specialist lenders, and make sure you choose a lending supplier with experience. Ask what proportion of self-employed people they lend to, for example.
Make sure you question how a loan will be structured, as well as the premium you will be paying above standard interest rates if you have specific circumstances. What it all comes down to is that there are opportunities for the right borrowers even if they don’t meet ‘ideal’ lending criteria – being declined by a bank is no reason to give up.
Campbell Smyth, CEO Asia Pacific, Bluestone Mortgages
