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We know that the alternative lending market was born out of the banks tightening up their criteria for loans. So are some of the key items alternative lenders consider when assessing applicants?
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A deeper look at the criteria around alternative lending
04 July 2017
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12 minute read
While the banks’ criteria for lending to small businesses have become increasingly tougher, alternative lenders market themselves as being more flexible and accessible.
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While there are varying levels of criteria within the alternative lending market depending on the model of the lender, they are generally less strict that the banks, according to Octet general manager Brendan Green.
“Non-banks have different business models and different capital requirements, and are generally more willing to work closely with SMEs to find unique solutions tailored to their needs,” Mr Green says.
“They are free of the constraints placed on deposit-taking banking institutions. Alternative lenders can make informed and timely credit decisions based on an SME’s financial merit, rather than relying on its hard assets for loan eligibility.”
Key considerations
Because many alternative lenders operate online, they can use data from various sources to help assess applications quickly according to Mr Green.
“This translates to shorter application to response times, and more flexibility for critical elements like interest rates and lending limits,” he says.
“By offering faster, alternative solutions designed specifically for SMEs, non-bank lenders can increase the pace of trade to help businesses thrive.”
OnDeck CEO Cameron Poolman also highlights the use of data as a tool to assess the health and creditworthiness of a business more accurately.
“[Alternative lenders] use a host of new data sources and data intelligence to assess the risk of borrowers to give loans quickly, whereas with traditional lenders, borrowers usually have to wait weeks for manual assessments to be done,” Mr Poolman says.
“Using an online lender is the easiest way to get a faster approval. We use digitised information such as cash flow data to quickly assess a customer’s business.”
Mr Poolman says that many lenders base their decision at least partially on a businesses credit score, so it's handy for an SME looking to apply for a loan to be aware of their credit score and how it could impact their application.
“We also use credit scores, so knowing your business credit score is always a great way to start the process. Almost every business will have a score, even if they don’t realise it,” he says.
Serviceability
Moula CEO and co-founder Aris Allegos says that at the end of the day, it all comes down to the SME's ability to service the loan.
“What we really focus on is serviceability, which sounds like an odd thing to say because people should be able to service the loan, but we do see many instances in market where serviceability is a major decision point,” he says.
Mr Allegos says that begins by looking at their historical revenue, but then assessment of other outstanding loans or analysis of accounting data are often taken into consideration.
“We look at the applicant to determine whether they can pay us, can they meet those principal and interest instalments, so what's their historical revenue look like, and then looking at the balance sheet and what the other liabilities are,” he says.
“So as far as the liability side, it's understanding what other outstanding liabilities do they have, what other debt is there that’s going to make it harder for them to service this loan.”
Matt Bauld, who is head of sales and business development at Prospa, says that technology is allowing alternative lenders to dig deeper into this data than ever before.
“What they're looking for basically is consistent cash flow coming into their business. That can be done through different means but mostly through fintech platforms which actually look at their bank statements to give insight into the amount of income coming in and what their expenses would be,” Mr Bauld said.
“Accounts payable and accounts receivable, invoices in and out of their business, where they're up to with their own tax, and a whole lot of other things can be checked through technology, which is like a secret source of data points.”
Receivables funding
Other types of funding models, such as invoice funding where the funder will pay an SME's receivable invoices immediately and enter an agreement to have the debtor pay them back, have even looser criteria.
The Invoice Market managing director and CEO Angus Sedgwick says that because there are two risk centres involved in invoice funding they are able to take on a higher level of risk. This means that invoice funders are often open to funding start ups, while other lenders aren’t.
“In debtor funding you've got two risk centres, you've got the client you're funding and then you've got their debtor,” he explains.
“It’s their customer who is actually obligated to pay the invoice so if it’s a small company dealing with a listed company, that’s great because the small company won’t be able to get any traditional debtor funding but we're comfortable with it because if they’re dealing with a big company then as long as we can confirm and get confidence that the invoice is a legitimate invoice, then we will fund that company.”
Otherwise Mr Sedgwick says invoice funders look at the same things as other alternative lenders such as the company’s financials and their management accounts.
“We also have a look at their ATO portal and what they owe the tax department,” he says.
“That's a crucial thing because whilst the obligor debt is the one we really are keen on, what we don’t want is the company that we're funding going into liquidation because the ATO is the most aggressive in terms of putting companies into liquidation for failure to pay taxes.”
Beyond the financials Mr Sedgwick says some other investigating is involved to try to build a get a character profile of the company and the people, before then checking the debtor as well.
“We do our own external checks through creditor bureaus and we also look at their PPSR, we'll look at the directors, if they been involved in a previously liquidated or insolvent company, if they've been involved in fraud,” he said.
“If that all good and we look at the debtor and the debtor is solid then we will fund them.”
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