SME Lending Options
The Credit Space
A reflection on the small business landscape in Australia over the past few decades would uncover an array of success stories, failures, expanding operations and those with slowly diminishing returns. All of this amidst the traditional business cycles and the new age marketing juggernauts heralded through social media.
One of the constants, during this recent past, has been the SMEs ability to, relatively easily, access funding. However, things are changing, and SMEs are finding it more and more difficult to secure finance and credit.
As a result of the 2018 banking royal commission and lower residential home values, lenders are tightening their requirements, and some are even retreating from the SME lending space altogether.
The availability of credit for SMEs is a genuine concern with suggestions the funding gap could be in excess of $80 billion. An indication of the seriousness of this problem and the potential economic impact has been the government’s creation of the $2 billion Australian Business Securitisation Fund (ABSF) to support the provision of finance for SMEs. The enabling legislation for the ABSF, the Australian Business Securitisation Fund Act, received Royal Assent on 5 April 2019, less than 6 months after it was proposed.
The market is also adapting quickly with a new range of fintech products that didn’t exist a few years ago. In themselves, they have opened up other options to the traditional offerings of the major banks. And whilst the banks are no longer proactively ringing up their business clients to offer them more money, they too are developing new products to suit the SME market. They realise it is not sustainable for them to turn away business lending because the owners do not have enough equity in their homes.
Business finance professionals are pivotal in linking SME finance, and lending needs to the rapidly evolving and ever-changing SME credit space. The role of the business finance professional starts by gaining clarity of the financial position of the business and the underlying business needs.
Some of the common SME financing needs are:
Growth – expanding businesses can require funding for new equipment, stock or staff
Opportunity – the ability to secure a new client or quickly scale a business to cope with increased customer demands can be contingent on quick access to cash
Funding Limits – when a business’s existing borrowing source reaches a limit alternative sources may be required
Immediate Expenses – when planned and unplanned costs hit a business at an inopportune time funding can see them through a tough period
Debtor Arrears – when clients are slow in making payments, resultant pressure can be alleviated
Personal Funding – where business owners are using personal credit cards or savings to fund business operations, finance options may be more appropriate.
Armed with an understanding of the business needs, the next step for the business finance professional is to determine whether borrowing is appropriate and if so, what is the best level and source for the funding? To do this, it is important to understand what the lender looks for.
Traditionally, the banks and major lenders have used the five Cs of credit (Capital, Capacity, Collateral, Character and Conditions) to determine if a potential borrower can service and pay back a loan. And whilst these remain a solid basis for lending analysis, many of the new non-bank/fintech lenders don’t require all of these criteria be met. An emerging point of difference for the alternative finance providers is that they place a greater emphasis and spend time developing an understanding of the business before they approve facilities. The business finance professional will build in-depth knowledge of the various lenders' processes and approach and, as such, be invaluable to their SME clients.
In conjunction with industry experts, elevateB has developed a self-paced, online, interactive Business Finance Certification. This program will provide you with the knowledge and skills required to become a successful business finance professional and work in the SME space. In addition, it provides business strategies and soft skills to assist you to better market and deliver your existing and new-found client offerings.
For more information on the Business Finance Certification, click here.