Surge in SME demand for non-bank funds

A sea change in where SMEs source funding appears to be underway as the broker channel expands and the economy forces small businesses to up their game

AS THE velocity and availability of money through traditional channels declines, non-bank lenders are seeing more demand for their products from small businesses. Small to medium-sized enterprises are grasping these alternative opportunities with both hands. Non-banks have seen a rapid rise in business credit over the last year to reach 25% growth on a six-month annualised basis in early 2023, according to the Reserve Bank of Australia’s latest Financial Stability Review. This is the fastest rate of growth in more than a decade. Industry surveys show that more SMEs started switching to non-bank sources to fund new growth as the government's COVID stimulus wound down last year, and this momentum continued as regular banks tightened their money spigots in line with higher interest rates.

The moves mark a big change in long-standing trends since the early 2010s when non-banks’ overall business credit growth traditionally oscillated between positive and negative but their residential lending growth sometimes spiked as high as 20% on a six-month annualised basis. This watershed can be attributed to a number of factors, some of which include banks focusing more deeply on the residential lending market while easing off fast and flexible business finance; but also to more SMEs turning to brokers for advice. “There has been a notable increase in businesses turning to finance brokers for guidance. This corresponds with an increased appetite for alternative commercial finance solutions,” says chief executive David Verschoor at Grow Finance (Grow). Grow is one of the non-banks fulfilling heightened demand for alternative commercial finance solutions. “Grow expects continued strong demand for asset finance via non-bank lenders as banks tighten credit lending requirements and SMEs focus more and more on their bottom line and look for ways to improve cash flow,” says Verschoor. Other non-bank lenders report the same. “OnDeck is seeing tremendous growth through our broker channel,” says chief executive Cameron Poolman. “This indicates that small businesses are increasingly embracing the opportunity that brokers provide to source funding from a variety of lenders. This not only saves a small business time [but also] helps to fast-track the funding process and avoids the need to use personal money for business purposes.”

Energy is another worry. An OnDeck survey found that 66% of small businesses nationally say they are being impacted by rising electricity bills. One in four small businesses say higher power bills are having a greater impact on profitability than rising fuel costs or the increasing cost of trading stock. These costs are expected to continue rising steeply over the next year. The latest Federal Budget introduced an Energy Price Relief Plan, but this funding will not reach all SMEs. Rather, incentives via bonus tax discounts for electrification and more efficient use of energy, including the availability of a $20,000 instant asset write-off until mid-2024, may have more impact. “The challenge for small enterprises lies in accessing the funds needed to meet the spending requirements for the tax breaks,” says Poolman. Regardless of what industry an SME operates in, there will always be a need for working capital when the economic outlook is uncertain. “Each sector has its own challenges, though the universal pain point for SMEs is cash flow management,” says Verschoor. The ACA Sentiment Tracker shows that 56% of the demand for additional finance at SMEs can be attributed to the need for cash flow and working capital. But this doesn’t mean that the general situation for SMEs is necessarily worsening; in fact, the probability of default across all SMEs has plateaued since January, despite further interest rate hikes. This shows that a majority of Australian businesses are weathering the tightening cycle. The tougher economy is forcing businesses to become more efficient, which often requires investment in new technology and equipment. “Yes, small businesses are navigating rising costs, inflationary pressures and supply chain issues, but this is driving innovation as enterprises seek to become more efficient and more productive,” Poolman says. “In particular, OnDeck is seeing a trend for small businesses to future-proof their enterprises and realise growth aspirations through investments in new plant and equipment and new technology.” Grow is also seeing demand in this space.

“The company has a broad appetite for new and used equipment, including plant and equipment, scaffolding, attachments for yellow goods – construction and heavy machinery – and many other business-critical assets,” Verschoor says. Indeed, the ACA survey shows that funding local growth is the second-largest source of demand for additional finance at SMEs, at 34%, with many SMEs continuing to predict growth in their operations over the next year. “It’s important to recognise that not all businesses are in distress. Many opportunity-seeker businesses are utilising disruption to drive growth through product expansion and market extensions,” Verschoor says. “Businesses continue to diversify their operations and are becoming less reliant on import and offshore manufacturing.” Deglobalisation is being identified by some, such as insurance behemoth Allianz, as a long-term influence and key structural driver that will contribute to an inflationary economy globally for the next few years.

OnDeck Australia is a leading online lender that focuses on Australia’s small business community. As OnDeck only provides small business loans, it is an expert in an area that has been underserved by the banking sector for too long. Importantly, OnDeck offers a skilled and experienced team, each of whom have been hand-selected for their understanding of the needs of small enterprises.

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At the same time, total housing lending at non-banks actually contracted for the first time in around a decade in early 2023.

Cameron Poolman

OnDeck

Industry experts

Cameron Poolman has served as OnDeck Australia's CEO since the company's launch to the Australian market in November 2015. Prior to joining OnDeck, he was founder and CEO of Grays Online – one of Australia's largest e-commerce groups focused on small businesses – from 2000 to 2014. He holds a Bachelor of Engineering (Mechanical) from the University of Sydney and a Master of Business (Marketing) from the University of Technology, Sydney.

OnDeck

Cameron Poolman

OnDeck

Industry experts

OnDeck

Cameron Poolman

Grow Finance chief executive David Verschoor is a seasoned finance professional with broad knowledge of risk management, regulatory compliance and trading. In addition, Verschoor has extensive experience in credit underwriting and policy formulation, plus the provision of strategic advisory. Before Grow, Verschoor worked at Westpac, BNP Paribas (Japan, Hong Kong and Australia), Natixis, Remara and R-Squared Capital.

Grow Finance

David Verschoor

“SMEs in general have become more proactive in seeking alternate financing solutions to help future-proof their businesses and maintain or optimise margins,” Verschoor says.

Cameron Poolman

OnDeck

Industry experts

“Yes, small businesses are navigating rising costs, inflationary pressures and supply chain issues, but this is driving innovation as enterprises seek to become more efficient and more productive”

CAMERON POOLMAN, ONDECK

SMEs commonly reach out to family and friends or advisers such as their solicitor, or use a credit card as a source of finance, if the bank doesn’t come to the party. But the big winner over the last year as banks reject SMEs has been specialist small business lenders. While non-banks’ share of total business credit is still low at about 8% of all business lending, the demand is gaining momentum as the economy continues to work through its pandemic hangover. The latest ACA Research SME Sentiment Tracker shows that business spending intentions remain strong. Intended investment in new staff and higher wages are no surprise amid the current labour shortage, but SMEs also expect their capital investment and marketing spend to rise in the next few months.

There is no shortage of issues keeping small business owners up at night. Inflation, tax obligations, and labour and supply chain problems are some of the factors to be considered in navigating the current environment. Equifax recorded high levels of insolvency in the March quarter in the construction and accommodation sectors, and the latest CreditorWatch Business Risk Index shows that construction and the food and beverage industry continue to be the most at-risk sectors. Businesses reliant on discretionary spending are on tenterhooks as inflationary pressures tighten consumers' purse strings. Australians spent less at cafes, restaurants and takeaway food services over April, and CreditorWatch predicts that spending in this area is now finally levelling off and will fall further over the upcoming winter months.

OnDeck

Cameron Poolman

David Verschoor

Grow Finance

David Verschoor

Grow Finance

David Verschoor

Barry Saoud joined Pepper Money in July 2021 as general manager, mortgages and commercial lending and is responsible for its strategic direction and operating performance across product, credit and settlements sales functions for Australia and New Zealand mortgages, commercial loans, personal loans and direct sales. With over two decades’ experience in financial services, Saoud has worked in numerous areas across legal, company secretary, sales and product management roles with the likes of Aussie Home Loans, GE Capital, HSBC and Norton Rose Fulbright. Saoud is a passionate leader with proven ability to grow businesses and exceed targets through innovative strategy and effective execution.

Pepper Money

Barry Saoud

Peter Vala has extensive experience in residential, commercial and development finance. He specialises in strategic implementation, leads the Thinktank relationship manager team, and works closely with brokers and aggregators.

Thinktank

Peter Vala

John Mohnacheff is Liberty's ebullient and charismatic group sales manager. With over 30 years of insurance, banking and finance experience, he is committed to improving the sales habits and disciplines of the entire group sales team. Before joining Liberty, Mohnacheff held executive roles at Westpac and Bank of Melbourne. He has a Bachelor of Business and a Marketing Master’s from the University of New England, and a Postgraduate Diploma in Organisational Behaviour from the University of NSW.

Liberty

John Mohnacheff

“Grow expects continued strong demand for asset finance via non-bank lenders as banks tighten credit lending requirements and SMEs focus more and more on their bottom line”

David Verschoor, Grow Finance

A turning of the tide?

An environment with different challenges demands different solutions

A turning of the tide?

An environment with different challenges demands different solutions

Published 26 Jun 2023

David Verschoor

Grow Finance

April 2022

Oct 2022

April 2023

Non-banks

Source: Reserve Bank of Australia Financial Stability Review, April 2023

Business lending trends: A forking of paths?

Oct 2021

Banks

Grow Finance is a leading non-bank business lender with a vision to help companies thrive in today’s increasingly complex and competitive environment. It is a ‘one-stop shop’ for all asset finance and working capital requirements, including business loans plus asset, trade, invoice, floor plan and insurance premium finance. Grow is agile, innovative and inspired by product fusions and redefining product classes. The Group actively responds to market demand with sharply priced product enhancements, product extensions and new products. Its growth is sustained through continual platform enhancements and progressive team extension, as supported by a recent capital raise and new warehouse facility.

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Everyone expects things to happen faster in a post-pandemic world, and funding decisions are no exception. “Increasingly, SMEs prioritise the speed of funding to enable opportunity cost,” says Verschoor. Time is at premium in the current environment. “The sooner a small business can access funds, the sooner it can take steps to get growing. An opportunity to purchase discounted stock, for example, can be very time-sensitive,” Poolman says. SME owners are also extremely busy, so they appreciate a simple application process. “Small business owners simply don’t have the time to pore over lengthy loan application forms. This is why OnDeck only asks for six months’ worth of bank statements to be uploaded to our secure online portal – it’s very simple and very quick.” OnDeck’s Lightning Loans can have funding to approved applicants in as little as two hours. The ease of dealing with the lender is often enhanced by technological adaptations to make life easier for both the broker and client. “Grow can often provide access to capital very quickly with less red tape, which includes flexible solutions via a single assessment process,” Verschoor says. Flexibility is another key factor in attracting and retaining SME clients. “It’s important for brokers to understand their clients’ needs and work closely with lenders to present viable long-term options that avoid boxing customers into high-interest, inflexible products or terms,” Verschoor says. Small operators and sole traders also appreciate not having to provide security for a loan, something that non-banks can allow for. “Small businesses are often asked by mainstream lenders to stump up residential property as security,” Poolman says. “This blurs the line between private assets and business assets, which is not good business practice. Brokers can be confident that their small business clients don’t face this risk with OnDeck.”

What small businesses look for in a funder

MORE SMEs PLAN TO BORROW FROM NON-BANKS

Proportion of SMEs intending to fund new growth through non-banks

Source: ScotPac bi-annual SME Growth Index

It’s no coincidence that the number of brokers who have diversified into commercial lending exceeded 6,000 last year as a result of SMEs’ demand for alternative funding sources. Small business owners can hardly be expected to keep up with the large range of lending products on offer themselves. Indeed, the lack of awareness among SMEs of the alternatives out there has been highlighted as a problem in past industry surveys. This is slowly changing as they come to rely more on brokers. An OnDeck survey recently found that six out of 10 small businesses surveyed would consider using a broker for their future financing needs. “That’s a massive pipeline of opportunity for brokers to tap into,” Poolman says. Non-banks make tapping into this demand as easy as possible for brokers looking to branch out. Grow has established a specialist team dedicated to supporting and educating mortgage brokers and other professional service providers who are diversifying their product offerings, and has a BDM presence in all states. OnDeck’s accreditation process is quick and easy, and both companies take pride in their technical support. Brokers are often surprised at how quickly things can move with a small business loan compared to a housing loan. “It’s a great way for brokers to diversify their businesses, add new streams of revenue and provide a holistic service,” Poolman says. Although there are some signs of life in the housing market of late, non-banks’ total housing lending is still only at around 5% of total lending since the pandemic boom. This suggests that brokers interested in growing their books should hitch a ride on the flourishing alternative options offered by non-banks for business lending.

More business, more brokers

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Mild growth/contraction = <5% on six-month ended annualised basis

Strong growth/contraction = >20% on six-month ended annualised basis

Medium growth/contraction = 5–20% on six-month ended annualised basis

Growth in business lending: banks vs non-banks

Nov 2020

Nov 2021

Feb 2023

27.4%

47.0%

28.7%

Cameron Poolman, OnDeck

Mild growth

Mild contraction

Medium growth

Strong growth

Oct 2021

April 2022

Oct 2022

April 2023

Banks

Non-banks

Source: Reserve Bank of Australia Financial Stability Review, April 2023

Mild growth/contraction = <5% on six-month ended annualised basis

Strong growth/contraction = >20% on six-month ended annualised basis

Medium growth/contraction = 5–20% on six-month ended annualised basis

Growth in business lending: banks vs non-banks

Business lending trends: A forking of paths?