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How banks and alternative lenders can work together

While some see banks and alternative lenders as polar opposites, the two can in fact work together to provide the best financial outcomes for SMEs.

Insights Peter Winterflood, BDO 05 July 2017
— 3 minute read

Traditional bank funding for many SMEs has become increasingly problematic.


SMEs are often looking for alternatives and there are many new participants, some of which are facilitated through fintechs. There are also some long standing non-bank financiers focused on assisting SMEs grow and prosper.

When it comes to choosing between traditional banks and non-banks, it should be clear that it is not necessarily one or the other. The two can work together to provide the desired financial outcomes for SMEs.

The big four major banks, the large regional banks, and smaller emerging banks are still ready, willing and able to provide financial support. In fact most banks continue to market heavily to this sector of the market as it is a huge segment at the forefront of Australian business activity and still a major source of opportunities as SMEs grow.

SMEs with strong security backing, a good track record with proven, sustainable profitability and good financial records and budgets will invariably have their finance requirements met by one of the traditional financiers. This may include the provision of term loans, overdrafts, bank guarantees, credit card facilities, online payment facilities as well as transactional facilities comprising credit accounts, online deposit accounts and EFTPOS.

However, unfortunately the wherewithal required to secure the desired level of finance in a timely manner is beyond many SMEs. This is particularly so when either the industry or the actual business has unique characteristics or is not generic like an established franchise.

While some traditional banks do embrace true ‘cash flow lending’ for SMEs, the major defining factor tends to be whether or not hard asset security, ie ‘bricks and mortar’ is available to support bank borrowings. In many cases where there would only be the family home, there is a reluctance or potentially insufficient equity to provide enough security to support the level of borrowings. This is particularly true for a business growing rapidly and demanding increasing levels of working capital.

The range of non-bank sources of finance include:

  • Debtor finance/invoice discounting
  • Trade facilities
  • Supplier credit lines
  • Equipment finance
  • Extended or more favourable terms from creditors
  • Shorter payment terms from debtors
  • Peer-to-peer lending
  • Crowd funding
  • Export finance and investment corporation
  • A range of state and federal government grants for research and development
  • Private equity
  • Franchise lending
  • Private loans
  • Angel investors

The security sought for many of the above debt solutions would include a General Security Agreement (GSA) over any or all of an SME’s debtors, stock, equipment or contracts.

There are pros and cons with all of the above which should be fully researched and investigated before committing to any deal. This is particularly so when the transaction involves equity from private equity sources, or angel investors. This source of funding brings with it issues of control as opposed to debt arrangements where the major considerations are around structure and cost.

It is important to note that some of these non-bank sources work very well alongside traditional banks. For example, a bank and a non-bank provider of invoice discounting finance or trade facilities can work together and share security, thereby enabling an SME to access additional working capital beyond the capacity of its transactional banker to provide.

Notwithstanding the availability of other forms and sources of finance, each and every SME must ensure they are ‘investor ready’ to not only be able to access appropriate finance but to be able to obtain the best possible deal in terms of structure, amortisation, monitoring and reporting, covenants, term, interest rates and fees.

Without fail, whichever course an SME takes there is a vital seven-point checklist that must be ticked off first:

  1. Complete a business plan with clear strategy and risk analysis supported by policies for the handling of the major risks that your business faces
  2. Ensure you have up-to-date and timely historical financial statements
  3. Produce three-way (cash flow, profit and loss and balance sheet) projections for at least the next 12 months, with major underpinning assumptions clearly articulated and focused upon the major drivers of your business
  4. Form an advisory board comprising trusted advisers from outside your business
  5. Ensure all ATO commitments are up-to-date and avoid the need to enter into payment arrangements with the ATO if at all possible
  6. Keep a clear credit history by paying all outstanding creditors within terms
  7. Be aware of the fact it is not only your financial performance that impacts your ability to obtain finance but also your behaviours such as open and honest communication

If you don’t have the time, resources or expertise to complete the seven-point checklist, and produce reliable and relevant information, you should seek professional advice.

How banks and alternative lenders can work together
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