It’s been a busy few months for the Australian SME lending market, culminating in Kenneth Hayne’s Banking Royal Commission report which some believe will have a knock-on effect on the availability of business loans from the major banks.
At the same time, small and medium sized businesses are eagerly awaiting the advent of the state-backed Australian Business Securitisation Fund (ABSF) which should improve the supply of funds from smaller banks and non-bank SME lenders.
Both of these developments, of course, come in response to deficiencies in the business lending market: both the lack of funds in the decade following the financial crisis, and the exposure of the behaviour of the big banks towards their small business customers. The upshot is likely to be that even more businesses turn to various forms of alternative funding – and that means that business owners need to be aware of all the benefits and risks.
The Rise and Rise of ‘Alternative Lenders’
Writing in the Sydney Morning Herald, Dominic Lambrinos of Chiefly Securities said: “We expect there will be stronger demand for non-bank finance in the commercial and industrial property sector following the release of the Hayne Royal Commission report. There is a strong prospect that finance for projects provided by the major banks will be further squeezed and the slack will continue to be taken up by non-bank providers.”
This non-bank sector was already growing before the report, and is expected to receive a further boost from the ABSF which will invest up to $2 billion into “providing significant additional funding to smaller banks and non-bank lenders to lend to small businesses on more competitive terms.”
These products, however, will be little different from the secured business loans and unsecured business loans that have been provided by banks for decades. They will, of course, remain useful products and will be the mainstay of some industries.
Understanding Business Loans
While it should generally be a good thing that business owners get a bigger choice when it comes to choosing a loan, the variety of offers available is likely to grow too, and the pricing structure of business loans is not at all simple. Alongside the new guides too secured and unsecured business loans linked above, TIM has therefore provided a useful glossary for those seeking to negotiate the best possible deal for their business.
In particular, business owners and finance chiefs need to add up all the extra costs that lenders charge across the term of the loan – ‘dishonour fees’, ’prepayment penalties’ and ’origination fees’ to name but a few – and add those to the interest payments (variable or fixed) in order to make a fair comparison of costs between the many providers.
Additionally, they will also have to make judgement calls on the personal risks involved in providing security, and the cash flow implications of committing to regular payments.
True Alternative Finance
While fintech is the buzzword among alternative business loan providers, where technology is arguably making the biggest difference is in more flexible and innovative forms of finance, such as the cash flow finance offered by TIM
Trade finance, supply chain finance, and of course invoice discounting are all viable funding methods for a trading business which supplies other companies and has a healthy order book. These funding methods are based on the current state of your accounts receivable and order books, not on credit history. They therefore better reflect the needs of growing businesses, and with TIM, they are based on a simple, easy to understand fee structure.
You can find more about these highly effective forms of finance, and the smart ways you can now manage and combine them, on our website. Or you can get in touch and we’ll tell you just how much cash you could raise – in a matter of days!
Get tomorrow’s cash flow today.