Business Lending is perhaps one of the most critical factors that an economy must consider for financing its entrepreneurial ambitions. It enables businesses to fund their growth ambitions and undertake expansion activities while empowering economic prosperity.
We often see companies making announcements on the ASX related to bank loan facility or revolving loan facility – these two facilities are among the different forms of business loans. Such types of funding are usually meant for the working capital purposes of a business.
According to the Australian Bureau of Statistics (ABS), there were around 2.37 million businesses on 30 June 2019. During the year 2018-19, about 62.5k businesses (net) were added in the country.
Around 93% of these businesses had a turnover of less than $2 million, 74.5% businesses had a turnover of less than $200k, and a quarter of businesses had a turnover of less than $50k.
In Australia, business categorisations depend on the type of regulator.
In the Corporation Act, starting after 01 July 2019, a small proprietary company constitutes entities with less than $50 million in annual revenue, having less than 100 employees at the end of the financial year, and having consolidated gross assets of less than $25 million at the end of the fiscal year.
As per the Australian Tax Office, a small business entity is defined as an entity that has an aggregated turnover of less than $10 million. According to ABS, the small businesses are the ones with an Australian Business Number (ABN) and Goods and Services Tax (GST) activity with an annual turnover of less than $2 million or when the business has less than 20 employees.
In its July 2019 Small Business Counts report, the Australian Small Business and Family Enterprise Ombudsman noted that:
- a little over half of the small businesses cope with a delay in receiving invoice payment.
- External capital access to support cash flows is becoming a challenge for businesses.
- Royal Commission outcomes have made it harder for small businesses to access funds as a result of stringent lending norms.
Business lending in Australia
Given that the majority of the businesses fall within the small-businesses category in Australia, it indicates that there is a larger number of lenders willing to fund these businesses as the category constitutes the majority of the business lending market in Australia.
Small businesses should act astutely in choosing financing options as the terms of each lender would be different – providing you with distinct value. Australia’s small business community should undertake in-depth research prior to accessing funding, which would enable them to access optimal funding options.
Important considerations while choosing a funding product
As competition is growing rapidly, we are witnessing that new-age lenders are making entry into the lending space. At times, these new entrants have disruptive offerings like online applications, quicker loan disbursement etc.
However, you should pay close attention to the hidden costs and extract all the available information from the loan agent/lender including hidden fees, one-time costs, annual interest rates, and payment schedules, among others.
Just like mortgages, business lending products also offer the option of having fixed interest rates and variable interest rates. In a fixed rate product, the interest rate remains unchanged over the term of the loan. In a variable interest product, the interest rate change according to the underlying benchmark of the products, and benchmark rates would change as per the monetary policy rates of the country.
Securing business funding could be easy as new-age lenders and changing landscape in the financial services industry are delivering ultimate benefits to the customers. Nonetheless, there are additional critical factors to consider after you get funding.
Perhaps the most critical aspect after a business has secured the required funds is to plan for the repayment of the debt. It may include forecasting your cash flows, creating a provision from profits to repay the debt, refinancing options, etc.
Moreover, financial planning of your business would keep you acquainted with the obligations and the desired targets, which would enable to meet those obligations.
Govt backed liquidity for SME lenders
In efforts directed towards supporting the liquidity for SMEs financing, the Federal Government had established the Australian Business Securitisation Fund (ABSF) in April 2019, which is administered by the Australian Office of Financial Management.
AOFM has made substantial progress since the launch. In the latest development, the department had invited market participants to submit investment proposals – its cut-off date was 15 January 2020.
First round of investments by ABSF is expected to be announced in the first or early second quarter of 2020. As per the ABSF legislation, the first tranche is worth $250 million, which was transferred to ABSF special account on 01 July 2019.
Further, the second tranche, worth $250 million, would be transferred on 01 July 2020, and additional tranches of $500 million each would be transferred on 01 July of 2021, 2022 and 2023.
ABSF will invest in the ABS market, including warehousing facilities and securitisations having SME loans as underlying assets. Ultimately, these investments would provide liquidity to the SME lenders, especially the ones with underlying loans in securitisation, in the wake of tightened lending norms for SMEs after Financial Services Royal Commission.
Lenders under the spotlight
At the backdrop of lending norms turning stringent, lending market (including non-bank lenders) embracing technology, changing customer preferences, and other factors – the Australian economy is witnessing the rise of tech-enabled lenders with customer proposition like fast loan disbursement process.
Become offers unsecured business loans, invoice funding, equipment loans, line of credit, and merchant cash advance. Its customers get LendingScore™, and the company leverages proprietary technology. The Company’s website shows that the lender has disbursed $200 million in credit, and customer count is over 175k.
Established in 2002, Capify offers merchant cash advance and business loans. The Company projects the business as a trusted leader in the alternative small business lending market, having maintained an A+ rating with the Better Business Bureau (BBB). The lender has funded over 24k transactions and has over 200 employees worldwide.
Lumi is engaged in providing short term business loans, unsecured business loans, and small business loans to businesses. The Company believes that the main distinction between its business and other SME lenders is that Lumi leverages big data, which enables the businesses to access fast and flexible funding.
Founded in 2007, the company had loaned $12 billion to small businesses globally by 2019. In 2015, OnDeck made an entry in Australia. Some of the top industries served by the business include hospitality, wholesale, professional services, trades, retail and healthcare. OneDeck offers unsecured business loans up to $250k in Australia.
Westpac Banking Corporation (ASX:WBC)
Westpac provides a range of business loan products including unsecured business overdraft, unsecured business loan, business overdraft, business loan etc. Under the Company’s variable rate products, the base rate for a small business loan is 4.91% p.a.
Commonwealth Bank (ASX:CBA)
Commonwealth Bank has many products for business loans, including business loans, overdraft and lines of credit, car and equipment finance. The bank’s BetterBusiness Loan (BBL) product is offering $10k to $1 million, with interest rates as low as 3.49% at present –depending upon terms and conditions. BBL is available with fixed and variable interest rate options.
Prospa Group Limited (ASX:PGL)
Prospa Group offers small business loans for amounts ranging between $50k and $300k. According to the group’s website, the loans have daily and weekly repayment options, and charge a 3% origination fee. Information related to interest rates is not available.
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