Almost everyone has heard of a bank – they take deposits and lend out money to consumers and businesses who require funding. While banks are common knowledge, non-bank financial institutions (NBFI) remain less understood. An NBFI is a commercial entity that offers loans and other financial products, yet does not hold a full banking license and cannot accept or hold deposits.
These financial institutions provide services that are not usually suited to banks and serve as their competition, often specialising in specific sectors or product verticals. NFBI’s are privately owned, giving them greater flexibility in the rates and fees they are able to offer their customers. By providing low-cost loans, they promote competition by forcing banks to drop their rates and innovate their products to stay competitive. An NFBI is usually considered by people looking for a small business or personal loan. Here are the main types of non-bank financial institutions you need to know about:
Insurance Companies
Insurance firms are considered non-bank financial institutions as they provide a financial product without lending or looking after deposits on behalf of their customers. Insurance companies offer protection from economic risks such as damage, theft and death to generate a return. General insurance covers your business from various risks of loss in the medium term, whereas personal products such as life insurance are ongoing until the holder’s passing. Consider how insurance plays a role in protecting your business from loss.
Institutional Investors
An institutional investor is an entity that pools money to invest in assets such as securities, property, other businesses or new loans. It’s a broad term that covers a range of institutions, including insurance companies, hedge funds, investment advisers, mutual funds or operating companies with excess capital to invest. Typically they make large purchases and trade securities in such volume that they qualify for lower commissions. You probably won’t deal with institutional investors too much unless you’re looking to sell equity in your business.
Non-bank Lenders
Non-bank lenders in Australia offer a range of lending services to individuals and businesses alike. They perform most of the functions of a bank; however, they are not able to take deposits from their customers. Instead, they source their funds from other investors or institutions. Non-bank lenders are not required to assess repayments in the same way banks are, making them more lenient and flexible when it comes to approving new loans. Without the large management structure of a bank, they typically offer a more personalised service with shorter turnaround times.
“Invoice financiers will pay you up to 90% of your current outstanding invoices with the balance 30-60 days later less a small fee.”
Non-bank lenders also offer products that banks are not willing to engage with, such as debtor finance. Debtor financiers will pay you up to 90% of your verified outstanding invoice value upfront. When your customer pays and the funds are received by your invoice finance provider, they’ll remit the remaining 10% minus a small fee to compensate for early funding. It’s an increasingly popular way to unlock the value tied up in your accounts receivable ledger. There is no ongoing interest and fees as it is not a loan. You are simply getting your own money upfront instead of waiting 30-60+ days for your customers to pay.
Financial Service Providers
The various financial services combine to form a massive global industry. Management consultants, mortgage brokers, credit unions, financial advisors and security brokers all play a part in helping their customers achieve financial outcomes. They work for a fee and offer advice and complete transactions for investors, businesses and other brokers. Using their expertise, they increase market efficiency and help investors liquidate their assets when needed.
Still not sure? Here’s what you need to know
- The same fair lending rules still regulate Non-bank lenders as banks; they just can’t take deposits or offer the same range of services.
- Non-bank lenders are more likely to grant your business a more extensive line of credit than a bank as they consider a more comprehensive range of factors.
- It’s just as essential to make sure you can meet your repayments. Be sure to understand the rates you’ll be charged and any other hidden fees.
A non-bank lender might be the solution your business is looking for. If you’ve been turned down by your bank for a traditional loan, consider your alternatives. Don’t let a lack of cash flow hold your business back. Use your unpaid invoices to unlock tomorrow’s cash today with OptiPay.
