How brokers can catch the SME lending wave

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Brokers are in the best position to read the currents as small businesses propel themselves forward – and it’s non-banks like Prospa that will help them get ahead

THERE IS an intuitive point when seasoned surfers leave the line-up and start paddling – it’s a window in time that novices can easily miss. For brokers looking to ride a wave of small business lending, that moment could be now. Residential lending is waning, struggling businesses need liquidity, and funding requirements look set to swell as SMEs anticipate growth on the other side of peak interest rates. “Brokers should be mindful of the challenges that lie ahead in the economic landscape, but also aware of the potential for growth,” says Prospa national sales manager Roberto Sanz. To be sure, there is a certain amount of churn in economic indicators with consumer sentiment oscillating at lows and many businesses conflicted about the outlook. Prospa-commissioned research by RFi Group showed business confidence was marginally down in December, but just one month later in a YouGov survey, 83% of business owners were saying that they anticipated growth over the following 12 months.

Prospa is Australia’s number one small business online lending specialist providing market-leading capital products and solutions to help Aussie small businesses grow and prosper. Established in 2012, Prospa ensures applications are simple and funds can be accessed within 24 hours. Its cash flow products and services allow small businesses to grow and take advantage of opportunities to run their businesses or help them pay for goods and services.

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Roberto Sanz, Prospa

Cutting through the noise, there’s no doubt that SMEs are wary but clear-eyed about the challenges. “Cash flow, managing demand, and access to working capital remains a constant need,” says Sanz. “SMEs with lower turnover are more likely to face challenges relating to cash flow, whilst higher-turnover SMEs are more challenged by economic and supply chain concerns.” The Reserve Bank of Australia’s 10 consecutive rate hikes in

Roberto Sanz, Prospa

as many months have resulted in a marked escalation in operating costs and eroded the already-slim margins of businesses. RFi research commissioned by Prospa shows that the negative effect of rate hikes on SMEs accelerated quickly in the second half of 2022, with these businesses significantly more likely to scale back operations, seek professional advice and negotiate on receiving customer payments. All this adds to the load that small businesses carry, in some sectors more so than others. Data from credit bureau illion shows that late payments increased by an average of 9% from December to February, and there was a rise in business failure risks around the country, with Sydney’s Western and Southwestern suburbs topping the list. illion cites the four highest industries in NSW in which businesses are at risk of failure as construction, transport, retail services and food services. These industries are generally twice as risky as professional services, manufacturing, healthcare and wholesale trade. Immature businesses in each of these industry sectors had an even higher risk of failure, with 50% of construction businesses, 30% of retail businesses and 33% of food services businesses at high risk of failing in 2023 if they had been in operation for less than two years, according to illion.

Prospa-commissioned research through RFi also showed that newer businesses were more likely to seek financial advice and take up a borrowing product, while micro-businesses and the construction industry were suffering more. “The building and trade industry has been significantly impacted by the changing economic environment, with its effects manifesting earlier in comparison to other sectors,” says Sanz. “The industry is grappling with several concerns, including escalating costs of raw materials, delays in the supply chain, and a shortage of labour.” And yet it's some of these struggling sectors that are also bullish about growth prospects. While the most optimistic sectors tend to be areas such as healthcare or trades and services, more than two in five Australian business owners and decision-makers expect revenue to increase over the next 12 months, according to a January YouGov Sentiment report commissioned by Prospa. “While this growth may take various forms, it will likely require funding to be realised,” says Sanz. “Not surprisingly, 26% of business owners intend to borrow funding in the next 12 months.” Some drivers of growth are likely to be improvements to existing product line-ups that were held back by the pandemic or investments in new technology.

These steps can include financing options with non-bank lenders such as Prospa, as well as reviewing and optimising debt structure while building cash reserves. Non-banks are in a strong position to help SMEs as mainstream Australian lenders take proactive measures to manage risk and be prudent in their approach in the wake of the Silicon Valley Bank collapse and Credit Suisse buyout. “Banks and alternative lenders are re-evaluating their risk polices and adjusting their risk appetite to align with current and future market conditions,” says Sanz. This is especially true for large banks whose core business is residential lending. When times are tough, their fallback position is to refocus on their core business and withdraw from peripheral activities. “Unlike Prospa, SME lending has never been a core business for banks, who pull back from SME lending,” says Sanz. Many SMEs don’t know where to turn. This is where Prospa and its strong broker network come in. “As SMEs are looking to trusted advisers to help them navigate the changing market conditions, we remain committed to providing our clients and partners access to flexible funding solutions that match business needs and support small businesses,” says Sanz.

“SMEs are looking to trusted advisers to help them navigate the changing market conditions, [and] we remain committed to providing our clients and partners access to flexible funding solutions”

“By diversifying their offerings, brokers can tap into a growing market and position themselves for success in the current and future economic environment”

Brokers are in the best position to read the currents as small businesses propel themselves forward – and it’s non-banks like Prospa that will help them get ahead

There is no doubt it is currently belt-tightening time, and SMEs have a range of steps they can take to weather the rougher conditions. Sanz recommends the following to small business owners:

MFAA data shows that the broker-derived proportion of new loans for residential is close to 72%, much higher than brokers’ share of the business loan market. At the same time, February lending figures showed the value of housing loan commitments was down 30.9% year-on-year to $22.6bn, while it’s been reported that market activity was incredibly subdued over the summer and mainly focused on refinancing.

The residential party is over

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Published 01 May 2023

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Source: Prospa-commissioned YouGov survey (January 2023)

Proportion of business owners expecting growth in next 12 months

83%

The study was conducted by RFi Group, commissioned by Prospa, December 2022

The study was conducted from 4 to 13 January 2023 by YouGov, commissioned by Prospa, with a sample of 520 small businesses with fewer than 50 employees

Review

cost structure

Renegotiate

contracts with vendors and customers

Prioritise

positive cash flow

Build

a stronger balance sheet

$BN

Source: ABS

$32.6

Mar 22

Apr 22

May 22

Jun 22

Jul 22

Aug 22

Sep 22

Year-on-year change in new loan commitments, total housing

Oct 22

Nov 22

Dec 22

Jan 23

Feb 23

$31.5

$31.4

$30.3

$28.3

$27.5

$26.3

$24.4

$23.4

$22.9

$22.6

$25.5

This makes for a crowded field chasing a shrinking prize in residential. “Considering these trends, brokers should plan ahead and take steps to diversify their services into SME lending,” says Sanz. With more SMEs facing challenges when trying to get funding, there is no shortage of demand for expert advice on how to navigate the waters.

“By diversifying their offerings, brokers can tap into a growing market and position themselves for success in the current and future economic environment.” One of the best ways to do this is for brokers to be alert to opportunities to leverage their existing client base and expand their services into SME lending. “Brokers need to ask their clients questions such as, what is their cash flow forecast? What pain points are headed their way? Can we finance that asset with a Prospa Small Business Loan? By asking the right questions, they can investigate options to support the cash flow of their business.”

show/hide YoY change

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+8.7%

+3.0%

-1.2%

-2.3%

-10.9%

-12.1%

-14.9%

-17.2%

-24.7%

-29.1%

-32.6%

-30.9%

Simplification of the borrowing process is another thing that customers are seeking. Sanz advises that brokers new to the area dip their toes in at first, while continuing to expand their main revenue stream, be that in the residential or commercial sector. “The balance between protecting their core business while leveraging their existing SME client base by offering business lending solutions would be a formula to succeed.” In surfer terminology, small waves before aerial tricks. “It’s crucial to remember that economic cycles are temporary and eventually come to an end, and brokers need to position themselves to thrive on the other side of the cycle,” says Sanz.

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