Access to working capital is regularly cited as a big concern for small business operators. However, the explosion of alternative finance providers indicates that change is on the way.
Statistics and studies have long shown that small businesses often struggle to access working capital – the funds to expand their operations, fulfil new orders, move to larger premises or hire additional staff.
The traditional path is to use the family home or another privately owned property as leverage for a bank loan. Yet for younger people locked out of the housing market, or nimble start-ups and small businesses without physical assets to their name, this route is simply not an option.
Others still, who may be in a position to do so, are not happy to shift their business risk to the family home.
As a result many business owners, having been turned away from their banks, rely on credit cards to meet this funding gap, or on loans from family or friends. Some even reluctantly sell stakes in their businesses to secure funding to expand.
Yet developments in loan application processing and credit scoring have given rise to a booming new alternative finance industry, and established overseas players as well as local start-ups are seeing Australia as an enormous untapped market for providing finance to small businesses.
What is alternative finance?
Just as the name suggests, alternative finance is a term for a wide range of non-traditional lenders, which operate in various ways to collate funds to lend to small businesses and private individuals.
Some operate as peer-to-peer or marketplace lenders or as crowdfunding platforms, taking their leads from the sharing economy. Others offer invoice trading or balance sheet lending, or act as more straightforward online lenders.
The one thing they generally have in common, though, is their use of the internet and digital technologies to develop cutting-edge credit scoring techniques, allowing them to assess a business’s creditworthiness against its biggest asset – its revenues – while reducing their overheads through online-based distribution and processing. all while delivering much faster turnaround times than a traditional bank – often providing a ‘yes or no’ the same day.
China is by far the largest source of alternative finance in the world, registering $US101.7 billion according to Harnessing Potential, Asia Pacific Alternative Finance Benchmarking Report. This accounts for 99 per cent of that originated across the whole of the Asia-Pacific region.
However, the remaining countries, including Australia, are seeing substantial volumes in their own right, and are notching up hefty rates of growth.
“Excluding mainland China, the rest of the Asia-Pacific region recorded a volume of $US1.12 billion in 2015, with a 313 per cent year-on-year growth rate from the $US271.94 million raised in 2014,” the report reads.
According to the KPMG-led report, which was released in march this year and surveyed 503 lending platforms across the APAC region, Australia ranked second (excluding China) in terms of both the volume originated by online alternative finance providers ($US348.37 million) and the alternative finance volume per capita ($US14.83 million).
How does Australia compare?
Toby Triebel, the co-founder and CEO of Spotcap, which operates in the Netherlands and Spain and has since launched on our shores, told the recent AltFi Summit in Sydney that Australia has a much larger market of SMEs needing – but not able to access – funding than other markets in the company’s European base.
Dermot Crean, director of invoice trading platform InvoiceX, explains: “I’ve worked in London for 25 years of my life; there is availability of capital for SMEs. It’s not as brilliant as what’s coming along [now], but there was capital. In Australia, there hasn’t been.
“The opportunity is actually bigger here than, say, in the UK, because the problem is more ingrained here in terms of the lack of capital.”
OnDeck’s US-based CEO Noah Breslow agrees. “We always thought the UK would have been next after Canada, which is kind of the obvious move for most American companies. However, we received a lot of interest from Australia, and I think there were a number of teams who reached out to us and said ‘We’d love to take your platform to Australia; we think there’s a great opportunity here’,” says Mr Breslow.
“And actually, Australia has a thriving culture of independent small businesses, so Australians don’t like buying from chains as much as maybe other cultures are comfortable doing.”
Yet it isn’t just foreign operators finding opportunity in the sheer volume of untapped demand for funding from Australian SMEs.
NAB’s former managing director of business performance Andrew Colliver and former lead business analyst Stephen Murphy recognised the need to provide working capital, and faster application procedures, to small businesses, and so teamed up to establish online lender Banjo in 2014.
A year earlier, Moula Money was founded in Sydney by Aris Allegos, Andrew Watt and Piers Moller.
“Unlike some other alternative funders out there, we took a view that we needed to build a platform that was bespoke to Australia,” says Mr Allegos, Moula’s CEO.
“I grew up in a family that has always been in small business – Mum and Dad were wholesalers in the outer suburbs of Melbourne; aunties and uncles on both sides were in small businesses. So I always had exposure to the difficulties associated with funding businesses like that, and it was the same 30 years ago as it is today.
“Overlay that with my more recent background, being I did come out of banking; I do appreciate how to underwrite businesses. So you put the two together and I saw an opportunity to solve some of the problems that my parents faced and that small businesses throughout Australia face today.”
Why obtain finance online?
“The operating system of small business is changing, like, in the US we see it all over the place – point of sale, marketing, lead generation and then accounting software is moving into the cloud instead of running it on your desktop, and the financing should be a part of that too,” OnDeck’s Mr Breslow says.
“The way [people] buy a plane ticket today is different than it was 20 years ago: they go online. The way they shop for goods and services, the way they look for real estate is different, the way they look for a job is different. So people are used to now going online in so many other aspects of their lives.
“I think as they go online in these other areas of their lives, it makes sense to go online for financing, and so I think that behavioural shift is something we will see a lot of in the next couple of years.”
“There is a sense of discovery in Australia, because they just haven’t heard about this type of product,” adds Cameron Poolman, the head of OnDeck’s Australian arm.
As the duo point out, online lenders don’t have the overheads of traditional banks and are also much more nimble, meaning they can provide same-day approvals and typically deliver funds within 24 hours.
Moula’s strategic part-ownership by Liberty Financial are indicative of the emphasis it places on the online world.
The lender also operates through finance brokers, which themselves rely heavily on online application processes regardless of the lenders they deal with. Mr Allegos says this is a channel that “we’re only just starting to open up”.
“It’s a big focus for the next couple of quarters,” he says.
The age of opportunity
As InvoiceX’s Mr Crean states, the opportunity presented by the broader alternative finance sector to Australian SMEs – and the national economy – is far from insignificant.
“For the first time in Australia, there’s actually a credible, deep source of capital that really wants to lend to you, a small business owner. Can you imagine that? We actually want to lend to small businesses!”