Australian small businesses are finding it hard to access capital, according to new research by SME lender OnDeck, and many have resorted to alternative methods of financing.
OnDeck’s survey of 500 small businesses nationally found just one in four (25.4%) said they have no difficulty accessing capital whereas the majority (74.6%) face varying levels of problems.
However, this has opened up opportunities for brokers to provide value to small business clients through providing much-needed access to funding.
Cameron Poolman (pictured above), CEO of OnDeck Australia, said, “Capital is the life blood of an enterprise, and an inability to access capital on commercial terms can have a long-ranging impact on small businesses.”
With 147 authorised deposit-taking institutions (ADIs) in Australia, one might think small businesses have plenty of financing options at a cursory glance.
However, when you consider that only 32 of these had financed a loan in October to either a non-financial business or a financial institution (which are typically not small businesses), the options become slimmer.
That pool of banks would likely significantly decrease further if the self-employed borrower had inconsistent pay or cashflow issues – challenges that are typical of running a small business.
OnDeck research in 2020 found that of small businesses that had applied for finance in the past, one in four (24%) had been rejected by a bank when seeking a business loan.
When you couple this with the rise of traditional lenders tightening up their business lending policies in 2023, the pool of banking options for many borrowers may have run dry.
Fortunately, small business owners have access to whole range of non-bank and private lending options. However, only 46% of SMEs considered non-banks as a viable alternative to traditional lenders.
Together, this leaves small business owners with little options on their own when they get rejected from a bank.
OnDeck research found that when the bank has said “no” to finance, SME owners reached out to alternate sources of finance – typically family and friends (42%), or a credit card (32%). Only around one-third (29%) partnered with an online non-bank lender such as OnDeck.
Over one in 10 (13%) small businesses gave up their goal of seeking funding altogether.
But money and mates have the potential to be an ‘oil and water’ mix – and in the current cost-of-living crisis, options to borrow from personal contacts could be limited.
Poolman said this approach also brings a “raft of risks”.
“Even where friends or family are willing to provide funding, without clear terms and conditions in place, misunderstandings can easily occur,” Poolman said.
“This can cost the SME owner a valuable personal relationship. In the worst-case scenario, disagreements can escalate to the point where the parties become embroiled in costly legal action.”
Many small business owners lack understanding of the financing options available, which can lead to risky decision-making.
However, this lack of knowledge also presents a high ceiling for brokers to add value by educating and guiding these owners towards optimal choices.
Recent research showed only 54% of SMEs are aware of alternative lenders, and while that’s a big improvement over the past decade, there’s still room to grow.
Some 5,864 mortgage brokers have already moved across the aisle to offer commercial broking services – a trend that has intensified over the last three years, according to the latest MFAA report.
And now non-banks have stepped up their offerings to support small business clients and the brokers who facilitate these deals.
An injection of funds can help businesses meet growth targets while also meeting cashflow challenges.
One in three small businesses surveyed by OnDeck report facing cashflow challenges, with 65% saying fast loan approvals would support improved cashflow.
OnDeck said its unsecured Lightning Loans, which are available for up to $175,000, provide an avenue for brokers to support their small business clients.
After an online application form and just six months of business bank statements, funds are available to approved applicants in as fast as two hours, according to OnDeck.
“Unlike borrowing from friends or family, OnDeck’s Lightning Loans allow brokers to give business owners a clear upfront picture on how much loan funding will cost” Poolman said. “This allows a broker’s client to make an informed judgement on the likely return on the items being funded – be it purchasing stock, upgrading equipment, or managing cashflow.”
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