Unsecured business loans: A booming alternative

It’s undeniable that small businesses are vital to the Australian way of life, accounting for more than 99% of all enterprises, employing around 5.5 million people and contributing an estimated $380bn to the economy.

However, despite their integral role, small businesses are being disproportionately impacted by the increased scrutiny Australia’s financial sector has seen of late.

As traditional lenders tighten their policies in response to scandalous findings by the royal commission, small businesses are being squeezed out, unable to access the finance they need to thrive.

In fact, a recent report by online small business lender OnDeck found that 55% of small business owners have been rejected for the finance they requested.

Unsurprisingly, the funding gap is having a major impact on small firms: 37% of respondents to the OnDeck survey said the delivery of services or products had been affected by an inability to secure credit, while 32% had been forced to make layoffs or had been prevented from hiring new staff.

As a result, an increasing number of small business owners are now receptive to alternative lending options, and when it comes to future borrowing plans, 33% of those planning to seek additional finance for their business said they would consider an online fintech lender.

For Danielle Szetho, CEO of Fintech Australia, the increased interest comes as no surprise.

“Through the use of technology platforms to provide easy-to-use and fast application and decision-making processes, and the ever-increasing access to rich, real-time business financial data, fintech business lenders are able to offer cost-effective loan products and service smaller, short-term loan requests, which cannot be easily offered by the banks,” she wrote in a recent report on the sector.

With more business owners turning away from traditional banks, it seems the market for online and unsecured business loans is booming – in fact, according to OnDeck’s Small Business Owners Survey, it could exceed $2bn in annual originations by 2020.

“Having grown at a compound annual growth rate of 151% since 2013, we expect to see continued strong growth in the coming years,” said OnDeck global CEO Noah Breslow.

Breslow also pointed to the US as an example of how the industry has the potential to flourish. Despite over 6,000 banks offering small business lending options in America, online lending to small businesses has soared.

“When you compare that to Australia with a more concentrated banking system, there is even more opportunity for online lenders to provide innovative lending solutions to SMEs,” he said.

Small business advocates have also recognised the important role played by fintech lenders. Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, praised the burgeoning sector in a recent report.

“I commend the fintech industry for its leadership in the financial services industry in addressing the needs of small business borrowers,” she wrote. “It presents a genuine alternative finance solution for small businesses where traditional banks are limited in their capacity to serve the sector.”

“A huge problem for small businesses is an even bigger opportunity for smart residential mortgage brokers” - Lachlan Heussler, Spotcap

However, the same report into fintech lending found that while the industry offers a viable alternative to big banks – and is making meaningful steps towards greater transparency and self-regulation – it can still be difficult terrain to navigate for small business owners.

“[A] lack of transparency has made it difficult for a small business to compare products offered by different fintechs, or products offered by fintechs and banks,” wrote Carnell.

“To make informed decisions on the best product to meet their needs, small business borrowers must be able to compare total costs, understand the obligations to exit early and the penalties if payments are missed, and trust that disputes will be dealt with quickly and fairly, avoiding costly legal processes.”

Clearly, a huge potential market has opened up for brokers who can identify reliable alternative borrowing options and help commercial clients understand the intricacies of unsecured lending.

In fact, the head of one major online small business lender says he’s already noticed an increase in the number of mortgage brokers branching out into business lending.

“This is becoming an increasingly attractive option for residential brokers looking to diversify as market conditions make it more difficult for them to undertake business as usual,” says Lachlan Heussler, managing director of Spotcap Australia and New Zealand.

“We help brokers get ahead of the curve by allowing them to lodge applications for business loans of up to $400,000 in only minutes, with responses in 24 hours” - Lachlan Heussler, Spotcap

According to Heussler, the number of growth opportunities that SMEs miss due to lack of finance is enormous – but he says brokers could make the most of a difficult situation if they were able to bridge the gap.

“A huge problem for small businesses is an even bigger opportunity for smart residential mortgage brokers to diversify their offering by embracing alternative commercial lending and not risk falling behind,” Heussler says.

“One of Spotcap’s main goals is to educate brokers and help them diversify their businesses by using our products,” he continues.

“We help brokers get ahead of the curve by allowing them to lodge applications for business loans of up to $400,000 in only minutes, with responses in 24 hours.”

While the fintech industry is able to meet the demands of small business owners to a greater degree than the big banks, Heussler says online lenders are no less reliable and many big names have banded together to create a code of conduct across the sector.

“Transparency and responsible lending is the key to ensuring the ongoing success of our high-growth industry, and we fully back policies that help business owners make informed decisions about financial products,” he tells MPA.

“Spotcap exists to help Australian business grow and thrive, so increased disclosure will help brokers make informed decisions about total costs and what services are right for their clients.”