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As the banks continue to tighten up their lending requirements, the market for alternative lenders has become buoyant and competitive. What options are on the table for you and your clients?
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Breaking down a new lending landscape
03 July 2017
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14 minute read
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The alternative lending market was born out of the tightening of the banks’ lending criteria according to Angus Sedgwick managing director and CEO of The Invoice Market.
“The reason that alternative lending has really come to the fore over the last three, four, five years is because of the difficulty traditionally that small business, and even medium-sized businesses have had in dealing with the traditional banks and the big four banks and the credit criteria they apply in terms of whether they'll lend money to a business,” Mr Sedgwick said.
“Pretty much unless you've got properties to offer up or you've got significant net assets on your balance sheets then the banks aren't particularly interested. Obviously some entrepreneurs saw that as an opportunity to come into the space with credit criteria that isn’t as tight as the banks.”
There is a myriad of options available for SMEs seeking finance other than the bank according to Brendan Green, general manager of working capital solutions Octet.
“Today, SMEs have a variety of alternative lending options that offer greater access to funding, are more flexible, and require no real-estate security,” Mr Green said.
“Viable non-bank sources of finance include private equity, crowdsourcing, working capital finance, receivables finance or flexible access funds such as credit cards.”
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Mr Green noted that there can be various benefits to sourcing finance from alternative lenders rather than the banks.
“Where traditional finance is typically a highly formulated offering with a long list of financial covenants, the emphasis from alternative lenders is less complex term sheets and significantly faster time to market,” Mr Green said.
“Alternative lenders help SMEs manage their balance sheets through a series of funding solutions designed to help businesses extend their cash flow and grow as they need.”
The core challenge for alternative lenders is the low awareness among the SME community according to Cameron Poolman, CEO of OnDeck.
“There are a myriad of financing options outside the traditional banks for small business owners, some of which they might not even be aware of,” Mr Poolman said.
“Beyond traditional non-bank lenders, who are closer to specialising in lending to SMEs, there are also technology-enabled alternative small business lenders whose lifeblood is the SME market.”
However, Mr Poolman believes that awareness is slowly rising and will only continue to do so.
“Accountants are advising their clients on the available loan options, referring them to alternative lenders for short-term, unsecured lending, where they need the funds quicker than a bank provides,” he said.
“Increasingly, SMEs are learning that these financing options are more than just alternatives - they are actually the best option for realising their growth aspirations.”
Debt finance options
Accodex CEO Chris Hooper explains the various models of finance that have emerged for businesses seeking debt finance:
Online loans
“Recently I’ve seen an explosion in this type of lending. These lenders are all online and will hook into cloud accounting solutions,” Mr Hooper said.
“This enables them to provide approvals within 24 hours, much quicker and much easier than the banks. They do attract a pretty high interest rate, but some clients are happy to pay the premium for speedy service.”
Peer-to-peer debt
“Inspired by the crowdfunding boom, peer-to-peer debt works where the lender is an individual that will lend a small amount of money to a company looking to borrow money. This enables the lender to spread the risk around various borrowers,” Mr Hooper said.
“The crowdfunding platform will aggregate all the loans and facilitate the transaction and collection. Without the same overheads as the banks, it reduces the cost to the borrower and increases the return to the lender.
Receivables finance
“Factoring has been around for a long time, but I have seen a new form of finance emerging which is essentially a marketplace for accounts receivables,” Mr Hooper said.
“Similar to the peer-to-peer debt, lenders can pick and choose which debtors they buy from which businesses and the transaction is administered by the platform.”
Merchant finance
“It’s amazing how much data comes through the EFTPOS terminal. Off the back of that I have seen an innovative form of finance which essentially extends a line of credit to the business assessed entirely on the point of sale data,” Mr Hooper said.
“They keep the rates competitive by collecting the loan repayment before the merchant settlement lands in the main bank account.”
Equity finance options
However, businesses aren’t just limited to debt financing according to Mr Hooper.
There have been some significant policy changes in legislation and technology with respect to equity financing, resulting in a handful of innovative options emerging to address the challenges in the equity space.
Early stage investor concession
“While not exactly a fintech revolution, the ESIC policies have made it very attractive for high earning taxpayers to invest in early stage companies,” he said
“The concession provides for a non-refundable carry forward tax offset of 20 per cent of the amount paid on the investment. While there are a number of eligibility tests and hurdles to jump over, this policy opens the door for some great tax planning opportunities.”
Crowdfunded equity
“Similar to peer-to-peer debt, crowdfunded equity enables a business to sell small parcels of shares in a private company. This is essentially the same as a public offer, but without the extent of disclosure requirements traditionally required,” he said.
“The Australian government has been pushing policy through to catch up with the rest of the world in this form of finance and it has given rise to a small handful of companies entering the market place in the last year. While it’s still unchartered territory, this is one fintech innovation worth keeping an eye on.”
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