Alternative lenders are truly booming and we’re only set to get bigger and better. There’s a whole list of reasons as to why, but one that rarely gets much of a mention is the emergence of ‘hustle culture’, writes Lumi founder and CEO, Yanir Yakutiel.
Australians these days are becoming increasingly obsessed with the idea of side hustles and the gig economy, which ups the demand for alternative lending.
Recent Australian Bureau of Statistics figures show one million jobs in Australia in the December 2018 quarter were secondary, taken on by workers who already have another form of employment – and with that kind of popularity in the side hustle ‘economy’, it’s no surprise that AMP Foundation found two-thirds of Australians have a passion project they hope to turn into a side hustle.
At Lumi we know that these side gigs aren’t just ways and means to increase income. They are also more than just a form of safety net. These are often passion projects, built to make a difference first and hopefully make some money along the way.
Think about the kombucha seller at your local Saturday morning market, or even freelance photographers or graphic designers. These people are an integral part of the Australian economy and community, and because they are recognised as such, the demand for alternative lenders like us is growing. Often this demand comes at a very early stage – as an opportunity to take on more business comes, but that opportunity also requires better equipment or more manpower.
With the banks turning away from micro-lending, alternative lenders can step in and provide the lifeline these young businesses need. Here are the trends I believe are working in our favour.
#1 The banks aren’t adapting, and don’t want to adapt
Let’s acknowledge what we already know to be true, but needs to be repeated as many times as humanly possible: the big banks have no desire to lend to small businesses that are getting off the ground. This is a good thing for everyone. Thanks to the Hayne Royal Commission, small businesses are starting to understand their interests are often far from aligned with banks. This is partially because of increased regulation and more reliance on the government to front policies that support SMBs so they don’t have to – but it also includes the blatant fact that there’s less opportunity to profit from smaller loans.
Our average loan size at Lumi is about $25,000 and on average SMBs are asking for loans from as little as $5,000. It doesn’t make sense for banks to provide smaller loans because it costs them just as much to underwrite a $1 million dollar loan as it does $100,000 – so the bigger banks obviously chose to focus on the bigger loans with better unit economics.
It’s pursuit of ever-increasing profit margins where it doesn’t make sense that ultimately hurts small businesses.
There are also fewer community banks out there. Traditionally SMBs would turn to a smaller bank for help with their venture but this is no longer the case. How often do you hear that someone you know is with a smaller, community bank? The big four have been dominating the market, so alternative lenders have had to come to the surface and support Australia’s small businesses.
#2 Let’s face it, the side hustle culture is growing for a reason
Hustle culture and the rise of entrepreneurs is a response to many modern phenomena: changing values between generations, depressed wages and the internet allowing for anyone to get ideas out there
But it’s at odds with our current system of funding, which is stuck in the past. This needs to change and that’s why we have alternative lenders to facilitate loans and capital where the banks cannot.
One trend we are seeing is Australian mothers who are passionate about their side projects in addition to having part or full time jobs. We fund a disproportionately high number of women business owners and we see that trend even more magnified at the lower end of the loan size spectrum, suggesting that they are disproportionately more predisposed to run micro and hustle businesses.
#3 The tech gap is widening where it matters most – speed and customer experience
It’s no coincidence that industry disruptors almost always end up focusing on elevating the customer experience. It’s the one thing that always goes to the wayside as monopolies and oligopolies grow complacent.
Funnily enough, that’s also exactly where the big four banks are out of touch. For our customers, all they have to do to get their funds is apply online, we get back to them within the hour (always less) and they get their funds into their bank account before the close of business. Why should a small loan take weeks to approve?
More to the point: small businesses that need loans are often reacting to a stimulus that’s happening in their world right now, not anticipating a problem next quarter.
For alternative lenders to succeed and be great contenders against the likes of neo and community banks, answering to consumer needs is a must.
The general nature of customer service is also evolving into something even more ‘instant’. In stark contrast to a bank’s typical lending cycle, our culture is (almost) defined by millennials bingeing on their favourite shows that they now get on-demand via streaming services, all the while enjoying a meal they ordered at the tap of a button via their smartphone. Businesses have responded to the need for instant-gratification in order to answer to the demands of savvy side hustlers.
People want things yesterday, which is why the SME lending sector is growing dramatically. The loans can be applied for in a quick, easy way without the harsh criteria of the bigger banks so businesses can get an answer quickly. Through our process, businesses can apply in less than an hour, and we approve or reject a loan request within an hour. We place a huge importance on the fact that people do business faster these days therefore they need their demands answered in the quickest way possible.