Debt & where to get it

Big banks

Australia’s big four banks control between 80% and 90% of the small business lending, deposits and home loan markets in Australia. There’s not much that we can say about the Big 4 that hasn’t already been said at and since the Banking Royal Commission.

Credit Cards

Smaller business owners often turn to credit cards due increased security and access hurdles required by banks for more conventional business debt products like an overdraft or term loan.

Australian businesses account for 30% ($14b) of the $50b of our national credit card debt. Although interest costs are higher, for many businesses credit cards are a useful default means of accessing short term credit to help them manage working capital needs. Credit card debt is expensive relative to other bank debt but if a small business can’t get other bank debt there is no point in making such a comparison.

The main trap with credit card debt is the interest cost which can run as high as 15 to 20 per cent per annum.

Here is a good article from Entrenpreneur magazine about Using credit cards to fund your business

Foreign banks

There are eight foreign banks licensed to operate in Australia with another 30 or so branches of foreign banks but none of these banks including major global players like HSBC, Rabo and Bank of China operate in the small business space.

Second tier banks

The big question small business owners ask about the second tier banks is “are they any different than the big four?” Many SMEs believe the regional banks are are a better proposition than the Big Four and more personal service is the most common reason for this. This article by theBankDoctor published by Smart Company explains  the regional banks are beating the Big Four in the fight for the SME dollar”

Credit Unions, Mutual Banks & Building Societies

These organisations are an alternative source of funding for small businesses that have reasonably simple transactional and lending needs but their capabilities beyond this are limited. They are Authorised Deposit-taking Institutions supervised by the APRA and ASIC under the Banking Act and Corporations Act respectively and are therefore regulated in the same way as all Australian banks. Deposits up to $250k are guaranteed by the Federal Government. Credit Unions and Mutuals are not listed on the ASX and do not aim to maximise profits for distribution rather they are owned by the members (customers) for the benefit of members.

The Customer Owned Banking Association is the industry body representing ninety member institutions.

Specialist Lenders

Asset financiers are lenders which focus on providing debt facilities secured by a particular asset class. Lenders can build up vast knowledge of how such assets can be used to generate profits and accordingly they are often prepared to provide a higher level of debt (leverage) against these assets than perhaps a Big 4 bank might.

Debtor Finance

Debtor Finance is an ideal product for growing small businesses that are unable to offer their bank property as security. One of the great benefits of Debtor Finance is that it enables businesses to access funds to support continued growth without the lender imposing gearing covenants. SMEs can get leverage of up to 90% on their debtors whilst banks rarely go over 70% on property (unless it is a against a home).

Another advantage of Debtor Finance is that borrowers usually do not have to put their homes up as security. Not only is this an excellent risk minimisation strategy it has another advantage in that it affords the borrower the opportunity to diversify its banking relationships. They can get Debtor Finance from one lender plus a property loan from another thereby eliminating the risk of being exposed 100% to one bank.

In recent years CBA and ANZ have vacated this market and uncertainty exists as to the commitment of NAB and Westpac. This partially explains why the second tier banks and specialist debtor financiers have been able to make big inroads into this market and whilst it is true funding costs are higher than traditional bank debt, these businesses are prepared to pay for access to additional funds and the other benefits such as reduced bank reliance.

The Australian debtor finance market is being increasingly dominated by the second tier banks and the specialist debtor financier Scottish Pacific which in 2016 acquired its major competitor Bibby Finance. At the smaller end of the scale franchised debtor financiers like FIFO are able to offer a highly personalised service.

If you are unsure of whether debtor finance is suited to your business or how to go about getting such a facility in place it may be worthwhile talking to an independent debtor finance specialist or broker.

Online lenders

A number of different terms apply to the need breed of lenders entering the market these days. Fintechs (short for financial technology), marketplace lenders, P2P are but some of the titles used and whilst the business models vary in a number of respects, for the sake of simplicity we use the phrase “Online lenders” to categorise the entire sector. A genuine online lender is one which the application and decision making processes are largely conducted online.

Peer-to-peer lending is a form of Online lending which matches borrowers and lenders through an online platform. The P2P entity basically facilitates the matching of borrowers with lenders.

The attraction of Online lenders is the expectation of a “quick yes” via a streamlined online approval process. Small business Online lenders usually offer business loans between $5k and $300k and terms generally range from 7 days to 12 months. They make funds available in a matter of days and sometimes even hours. Rates vary from around 9 per cent to 30 per cent and often well beyond. Most loans are made without property security. Online lenders are usually not suited for businesses that have requirements for long-term debt and if you have property security you will probably be able to get a better rate with a bank.

There are currently in excess of 25 online lenders operating in Australia including Moula, ThinCats, RateSetter, Spotcap, Banjo, Bigstone and InvoiceX with new entrants coming on stream at regular intervals. Sooner or later there will be a consolidation.

theBankDoctor’s article “Finance through Fintechs is fast but ask these questions first“ published in BRW provides a more detailed commentary on SMEs and marketplace lenders.

A real challenge for SMEs when contemplating borrowing from an Online lender is being able to make “apples with apples comparisons on pricing. Unlike the big banks which price their loans pretty much the same, there can be a wide disparity between rates offered by Online lenders and a lot of this is hard for the SME to understand. Its often not until after the loan is repaid that you realise how much it has actually cost.

This article in Fairfax Media “Online Payday lenders are alive & well“ explains what to look out for and what should be done to make it an even playing field for SMEs.

In addition to the Online lenders described above, there are others that could be described as “payments marketplace lenders”. Some of these players like PayPal and Amazon are massive global businesses with millions of existing customers and they will lend to businesses that are customers and/or suppliers as well as facilitating payments.

Australian owned payments business Tyro holds a banking license and also offers lending facilities to clients that use its merchant facilities.

Brokers

There are hundreds of finance brokers who are able to help businesses that prefer to outsource the task of finding the best funding package. Many businesses owners are so busy they don’t feel they have time to commit to doing this task properly whilst others simply do not wish to deal to financiers. If you don’t have a broker, ask business colleagues and advisors for a recommendation. A good broker will save you time and money.