The changing world of small business financing

The number of small business owners expected to take an online loan could double in the coming years, and many of them are likely to be your clients.

While there is a broad range of business loan options available today, the trade-offs and costs associated with those options vary from lender to lender. Evaluating the differences between lenders and can be confusing – the wrong financing choice can hurt your client’s business in the long run.

Applying for traditional business loans can be time consuming. Compiling business financial statements and waiting for these documents to be assessed and approved can take weeks. As a result, many SMEs miss opportunities that require fast access to funds.

In the last 12 months, many alternative options to small business lending have become available for Australian SMEs, changing the way operators access capital.

According to a KPMG report released earlier this year, the online alternative finance market in Australia reached just over $348 million in 2015, rising from a shade under $83 million just two years prior.

That’s an annual growth rate of 281 per cent.

The Australian market has grown to be the second largest in the Asia-Pacific region, only surpassed by the behemoth that is China.

The upshot? For an ambitious SME, funding is available from an increasing number of sources.

Increasingly, smaller businesses are finding the hands-on approach of alternative lenders an attractive proposition.

You’re in a position to help clients navigate this maze of new options. Understanding how to evaluate those choices becomes increasingly important to help your clients borrow wisely.

Once upon a time, a small business needed to make an appointment with their local banker, bring in reams of financial statements and hope for the best.

Now, fintech companies can understand the strengths, weaknesses and opportunities of a small business through algorithms and the canny application of historical data.

No longer are large financial institutions the only game in town, and in fact many large organisations are teaming up with disruptive fintech players to bring new solutions to market.

Advising your clients

The bank is a good option in some circumstances, but it’s not the only option. Nor is it the one size fits all solution it might have been decades ago. There are many situations where traditional financing options are just not viable. With that in mind, here are three questions to help you and your clients determine the best fit for their situation.

1. What is the purpose of the loan?

If your client has an opportunity to purchase inventory at a discount, but needs to borrow funds to do it, the total interest cost of the loan might be the key metric to help determine whether or not the financing makes sense.

The loan purpose should influence the term. In the above example, it might not make sense to borrow with a term of four or five years to purchase inventory that will turn over within a few months. A short-term business loan might make more sense and have a lower total cost than a long-term loan.

2. How much does your client need to borrow?

The loan amount may help identify where to look for finance.

For example, many banks would rather lend $500,000 or $1 million instead of $10,000 or even $150,000. It’s just too expensive for them to accommodate the lower loan amounts. However, with streamlined application and approval processes, online lenders may be better positioned to offer those types of loans.

3. What does your client’s credit profile look like?

Many SMEs have never checked their business credit scoring, and this is an important step.

Knowing the health of their business will enable SMEs to make informed financial decisions and understand their eligibility for a business loan.

 

Andrew Birch

Andrew Birch

Andrew Birch joined MYOB in 2009 as General Manager, Enterprise Division. He became General Manager, Websites Division in 2010 and more recently was appointed General Manager, Industry Solutions.

Prior to joining MYOB, Andrew held a number of senior management positions within the technology, telecommunications and software sectors, particularly in the leadership and growth of significant technology companies, including Honeywell Pacific and Vodafone Australia, as well as mid size technology businesses within Australia and New Zealand.

Andrew holds a Bachelor of Engineering from the Swinburne Institute of Technology and a Master of Business Administration from RMIT University.

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