3% of SMEs used alternative finance in 2015, equating to $7.5 billion in funding, with transparency, flexibility and cost as the main reasons cited
The results of our inaugural Banjo Small Business Finance Survey show some encouraging results for the alternative finance sector, with nine out of ten SMEs preferring new finance sources to banks.
The survey, to be undertaken quarterly,and carried out in conjunction with Evolve Research, serves to understand how SMEs in Australia are financing their businesses and the funding challenges they face.
Alternative finance
30% of respondents rated their alternative finance business lender as ‘better than the bank’, citing transparency, flexibility and cost as the main reasons.
16% of SMEs are aware of alternative finance providers and 3% used an alternative finance provider in 2015. A further 6% intend to do so in the next year, with another 36% still unsure. By comparison, the thriving alternative finance market in the UK/Europe has a market awareness of 44% after approximately six years(i).
How are SMEs funded?
According to 2014 RBA data, there was $247bn in SME lending in Australia(ii). In terms of the main external funding sources, 3% of SMEs using alternative finance is a significant figure. It equates to around 7.5bn in funding in 2015.
By way of comparison, 4% of SMEs have used a foreign-owned bank and 8% a regional bank. The data highlights that an innovative alternative finance industry has emerged in Australia with substantial
growth potential to support the funding needs of SMEs.
The results indicate that alternative finance is fast establishing itself as a 5th pillar for small-business funding.
Showing growth of approximately 100% year on year since 2014 suggests an increased buy-in from SMEs with those having used it citing ‘flexibility’, ‘good understanding of my business’ and ‘cost’ as key factors influencing their decision.
Banks in comparison showed a CAGR of 2.1% in funding SME’s for amounts of less than $2m.
Funding challenges
There are 2.1 million SMEs in Australia(iii) and 51% have no business funding product(iv) post-GFC. The SME sector has cited access to finance as an issue their businesses face, and – as observed in the UK and the USA(v) – this has constrained investment and economic growth.
This survey supports these market observations, with 27% of SMEs stating ‘cost of finance’ and ‘availability of finance’ as major challenges for their business.
Based on the survey 80% of SMEs will likely be approved for an alternative finance loan, compared to approximately 1 in 5 from a traditional bank. Indicatively, for every 10 SMEs applying for bank funding, two were successful, one was unsuccessful and seven chose not to apply for various reasons including cost and collateral requirements.
Too many SMEs rely on cashflow and family debt and don’t apply for funds from traditional lenders because it’s simply too difficult.
Alternative financiers don’t take uncalculated risks with loans. Rather, they often have more detailed checks and balances when credit checking, thoroughly assessing the health of a business, enabling us to approve more loans without needing to rely on collateral at all.
25% of businesses surveyed missed an opportunity because of a lack of funding, a situation that is all too common in Australia. Lending is a necessary part of supporting investment and growth, SMEs
are screaming out for more accessible lending products.
The survey indicated SMEs found access to traditional finance ‘too strict’ and ‘too expensive’.
Survey demographics
The research is based on an online survey with the financial decision-makers of approximately 850 Australian micro-to small-businesses with fewer than 50 employees, conducted in December 2015 and January 2016. The sample base is reflective of the Australian SME market geographically, by legal type, industry size and composition, as revealed by ABS data.
Jeff Oughton consulting economist, Banjo Loans, (ex Head of NAB’s Economics team and director of Economics and Beyond) and Andrew Colliver, CEO, Banjo Loans, (ex senior NAB banker)
i The European Alternative Finance Benchmark February 2015 https://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf
ii RBA D7.3 Total credit outstanding by size and sector
iii ABS Counts of Australian Businesses 2014
iv Australian Centre for Financial Studies, Financial System Inquiry 2014
v The UK Alternative Finance Industry Report 2014
