Internet-based service providers have revolutionised everything from ridesharing to virtual workspaces and they are now having an impact across more traditional sectors including finance and the lending market.
Led by a new breed of fintech players, the alternative lending market is growing rapidly, with an increasingly diverse range of accessible online and offline financing products targeted at small- to medium-sized enterprises (SMEs).
Traditionally, SMEs looking to the alternative lending market had often had finance applications declined by their main banking provider. With so many alternative lending options available today, a conventional path to market is becoming less predictable. Rapid growth of the sector indicates SMEs are more willing to move away from the high street banks for financing, and are not fazed by the providers’ lack of bricks and mortar or traditional retail presence.
Fintechs have capitalised on this with products that emphasise agility including streamlined application processes, faster approvals and less security requirements over loans. They have recognised that SME owners are time-poor and want access to finance quickly; a need that banks struggle to satisfy.
Subsequently, SMEs are discovering that being declined by the big banks doesn’t have to be the end of the line for financing their business.
However, as with any financing solution, the devil is in the detail, and venturing into the alternative lending market is not without risk.
There are disreputable providers out there and we regularly hear of businesses falling victim to online lending scams. This is not indicative of the whole sector, but it does serve as a reminder to approach any potential lending provider with some caution.
Below are the practical steps SMEs can take to minimise risk while maximising the benefits of a loan product:
- The first, and most important step is due diligence. Regardless of how quickly you need the financing, there is no substitute for thorough research. Look into the background of a lender and the experience of other customers.
- Understand the terms and conditions of the loan. Will you be able to service the loan and are you aware of the fees and penalties for defaults as well as any other contractual obligations?
- Review the value-added services and tools the provider offers customers. Can these potentially add value to your business?
By assessing and comparing these fundamentals across providers and products, SMEs can build a reasonable picture of the suitability of a financing arrangement.
There are a number of hazards to look out for. Some of the risks you need to be aware of when considering a provider and any of their products include:
- Watch out for upfront fees. An indication that the provider might not be genuine is the requirement for upfront fees. The rule of thumb is to never pay fees (especially valuation fees) without first receiving application approval and a written loan agreement.
- Be wary of the application process. Manual application forms that appear simplistic, a lack of comprehensive information requests upfront or an apparent lack of systems and processes should all raise red flags.
- Understand the detail. Take the time to comprehend the loan and do not feel pressured to sign anything. Make sure rates and charges are fully disclosed including the total monthly repayments.
- Compare the rate against the repayment. Often the repayment amount can be significantly higher than the rate quoted; this can be indicative that hidden fees and charges are built into the agreement.
To maximise the opportunities of this emerging sector, while avoiding the possible drawbacks, it is advisable SMEs looking at the alternative lending market first seek professional assistance.
Advisers can not only minimise the risks of the alternative lending market, but also customise financing solutions using lending products that are the right fit for the SME.
The conventional wisdom of seeking professional advice when considering financing is that the resulting loan product is one that the SME will be able to service loan sufficiently, while minimising costs. One significant advantage of the virtual explosion of alternative lending offerings available today is a far more diverse market, which means greater opportunities to tailor financing solutions to meet an SME's specific situation and needs.
By considering implications for the business including tax, costs, security and volume, professional advisers can help SMEs identify the right product, or combination of products in a hybrid model to service their loan requirements.
It is worth noting that combining or structuring loan products can deliver advantages to SMEs in certain situations, but it is best left to the professionals.
Compared to the big banks, the alternative lending market is very much in its infancy. As the market matures and perhaps consolidates, broad-based SME concerns or perceptions regarding the risks of alternative lending will also dissipate. This will likely see alternative lending providers capture a more significant proportion of the market.
With so much change taking place in the market and so many alternative lending options on offer, how and even if, the big banks will attempt to recapture that share of the SME financing market is yet to be seen.
Regardless, for SMEs looking for financing solutions, it is clear that online-based fintech providers are here to stay.