As we await the release of findings of the Hayne Royal Commission into the banking and financial services sector, Peter Langham CEO of Scottish Pacific Business Finance shares his thoughts on the likely impact on SMEs and the small business lending market.
The impact will be far and wide. A nervous market needs to be comfortable that Australia will have responsible lending laws, and the market is looking for certainty about how lending rules will be enforced by regulators.
Banks and alternative lenders, superannuation funds, mortgage brokers and financial advisors are among those keenly awaiting the outcomes and wanting to know whether their business models will be shaken up, and if so, how.
It is the potential impact of the Royal Commission on the vital SME sector that is top of mind for us, given that for more than 30 years, Scottish Pacific has been lending to SME businesses to help them grow.
Availability of credit for SMEs
As a result of some of the evidence offered and the media coverage generated during a year of Royal Commission hearings, many commentators are worried that it will become even harder for the small business sector to access funding.
From where I’m sitting, it is still possible for most SMEs to get funding, just perhaps not at the rates or conditions that they are comfortable with. What has changed, as a consequence of the Royal Commission, is the banks themselves will have more rigor and more hurdles to jump over.
This means that business owners need to seek out alternative financiers to the banks, and there are plenty of these (mostly funded by the banks).
Our most recent SME Growth Index findings show 96 per cent of SMEs could name a key reason to borrow from an alternative lender, with fast credit approval and reduced compliance the main drawcards.
Whether a business owner turns to invoice finance, private equity or P2P lending, the important issue is for them to find the right terms, the right security, that suits their business.
Commercial brokers and accountants will have key role
The best way for SMEs to get suitable advice on funding options is via trusted business advisers, such as accountants and commercial finance brokers.
These advisers, with a day to day understanding of their clients’ businesses, can help SME clients find their best funding option by making them aware of how the different products work and what the risks and benefits are, especially when it comes to some of the newer market entrants.
Time to look beyond property security
Australia’s cooling property market, along with more stringent lending conditions, will definitely have an effect on SME owners who need to use their home as security for their business loan and the credit squeeze will be on for any business unwilling to look beyond property security.
Those who want bricks and mortar security will have less equity available to secure facilities.
With many viable alternatives out there, I find it hard to understand why any business owner would risk their home to secure a business finance line of credit.
It’s important to note that, along with the property downturn, Australian home ownership rates are falling. With increasing numbers renting rather buying, business owners will have to find funders willing to lend them money secured against assets other than property.
Businesses will need a similar long-term working capital alternative to property security, as generally unsecured loans are not suitable. Scottish Pacific represents the key secured lending alternative, with lending against invoices (receivables) and assets (equipment and inventory).
When it comes to secured lending alternatives, it’s notable that 77 per cent of growth SMEs who look beyond the bank choose invoice finance (SME Growth Index Sept 2018), eclipsing other alternatives such as merchant cash advances (used by 23 per cent of growth SMEs), P2P lending (10 per cent), crowd-funding (9 per cent) and other online lending (5 per cent).