From Uber to Airbnb, “disruption” is what happens when the majority is underserviced or undervalued by businesses’ biggest players. It’s exactly what’s happening to Australia’s Big Four banks right now.
While SMEs account for 96 per cent of Australian businesses, small-business owners are severely underserviced when it comes to securing loans from traditional banks. In fact, a recent Business Banking Index found that 39 per cent of small businesses are actively considering a move to non-bank lenders due to the long approval times and general “exasperation” with major banks.
Just as disruptive start-ups are rethinking almost every industry out there, alternative lenders are assessing risk in an innovative way, using big data in real time to enable more businesses to get the capital they need for growth.
And that means big trouble for the big banks. Here’s why:
You shouldn’t have to risk your home to succeed
Running your own business is challenging. The hours you spend working on your business are potentially time not spent at home with loved ones and friends. It’s safe to say that business owners are already giving up a lot, so why should they also have to put up their home or car as collateral to secure a loan?
As housing prices continue to rise disproportionately to income, more small-business owners, especially millennials, do not have the option to offer their home as security to the bank. In fact, research from East & Partners states 68 per cent of SMEs are willing to pay a higher rate to obtain finance if it means they don’t have to provide real estate security.
Similarly, the rise of eCommerce, cloud solutions and software-as-a-service (SaaS) means that many businesses today do not have valuable physical assets (such as heavy equipment or inventory) to offer the bank as security. These service-based businesses still require capital to fuel growth but they lack the type of security the banks are geared to accept.
This is where alternative lenders are providing a different way forward. With alternative lenders, business owners can opt for a slightly higher cost of finance in order to not risk losing their family home or being cut out of the process altogether.
It’s all about timing
Businesses move fast and are created more quickly than ever before. While many of these businesses have big potential, they lack the track record needed to be taken seriously by traditional lenders.
When assessing loan applications, banks often require accounting statements dating back four years – something many small or emerging businesses do not have. Alternative lenders, however, offer loans and credit to businesses with a shorter trading history. Rather than provide a lending decision confined to cash on hand and collateral, alternative lenders recognise growth potential.
Cashflow is one of the most critical factors to the success of any business. But small-business owners do not have the luxury of waiting weeks for a bank to process a loan application, make a decision and deposit the funds. Most alternative lenders, however, have a lending decision confirmed within 24 hours and the funds deposited with 72 hours. Hindered by lengthy paperwork, red tape and legacy issues, traditional banks simply can’t compete with the speed and agility of online lenders.
Large businesses that cannot adapt to the changing needs and expectations of their customers are bound to lose out to more agile and innovative players. The good news is SMEs can flourish with the help of new solutions that are built around those needs.
Yanir Yakutiel, CEO & Founder, Sail Funding
