Despite contributing more than half a trillion dollars to the economy and employing 70 percent of the workforce, small businesses are still having a difficult time securing finance. When starting out or growing your business the number one hurdle is often access to affordable capital. Current lending practices have long been a hindrance and most small and medium sized enterprises share frustration with the availability and conditions of credit from the big four banks.
“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,” said Campbell Smyth, CEO Asia Pacific for specialist lender Bluestone Mortgages.
Australia is ranked by the World Bank and International Finance Corporation and the second easiest country to launch a business and yet within the first three years of operation more than 60 percent of small business fail.
Figures released by APRA reveal that, across the board, the big four banks are tightening their mortgage underwriting standards and, of greater concern for small businesses, ‘low doc’ loans have declined from 6.4% of new residential loans to 0.7% since the National Consumer Credit Protection Act was introduced 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,” explained Smyth.
“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.”
It is not uncommon for small business owners to dip their hands into the own personal finances to fund their growth, said Smyth, with two thirds of owners using credit cards, where interest rates can be up to 20 percent. He also mentioned that another common approach is using home equity to support a small business.
Financing can become a greater issue for Australians looking to start a small business or try their hand as a sole trader if they have had a failed venture in the past. This often results in an automatic rejection from mainstream lenders.
This isn’t the end of the road though, highlighted Smyth, as there are options outside of the mainstream banks. In fact, non-banks now account for a growing segment of the loan market and specialist lenders can help small business owners with their diverse financial needs.
Smyth said being declined by a bank is no reason to give up and small business owners shouldn’t hesitate to ask their broker whether they work regularly with specialist lenders.
Australia’s alternative funding sector has grown faster than the US and UK, according to KPMG’s recent global study.
Driven by the demand for loans by small businesses, new generation online lender are one of the fastest growing sectors of fintech and, for now, lack regulation and transparency in Australia. Lenders don’t require a credit licence and interest rates are unrestricted even if they’re lending to sole-traders.
“Make sure you choose a specialist lender with experience. Ask what proportion of self-employed people they lend to,” he said.
“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.”