New survey shows nine out of 10 SMEs think emerging alternative finance providers are equivalent to or better than dealing with a bank.
The results of the inaugural Banjo Small Business Finance Survey show some encouraging results for the alternative finance sector. The survey, to be undertaken quarterly, serves to understand how Small to Medium Enterprises (SME’s) in Australia are financing their businesses and the funding challenges they face.
- Thirty per cent of respondents rated their alternative finance business lender as ‘better than the bank’ citing transparency, flexibility and cost as the main reasons.
- Sixteen per cent of SMEs are aware of alternative finance providers and three per cent used an alternative finance provider in 2015. A further six per cent intend to do so in the next year, with another 36 per cent still unsure. By comparison, the thriving alternative finance market in the UK/Europe has a market awareness of 44% after approximately six years.[i]
How are SMEs funded?
According to 2014 RBA data, there was $247bn in SME lending in Australia[ii]. The graph below shows where SMEs presently obtain funding:
Source: Banjo Small Business Finance Survey 2016
“In terms of the main external funding sources, 3% of SMEs using alternative finance is a significant figure,” says Banjo’s consulting economist, Jeff Oughton (ex Head of NAB’s Economics team and director of Economics and Beyond). It equates to around 7.5bn in funding in 2015. By way of comparison, 4% of SMEs have used a foreign owned bank and 8% a regional bank; “ The data highlights that an innovative alternative finance industry has emerged in Australia with substantial growth potential to support the funding needs of SMEs”.
“The results indicate that alternative finance is fast establishing itself as a 5th pillar for small business funding” says Oughton, whose company Economics and Beyond conducted the inaugural Banjo Survey with Evolve Research.
Showing growth of approximately 100% year on year since 2014 suggests an increased buy in from SMEs with those having used it citing ‘flexibility’, ‘good understanding of my business’ and ‘cost’ as key factors influencing their decision. Banks in comparison showed a CAGR of 2.1% in funding SME’s for amounts of less than $2m.
The recent East and Partners Business Banking Index suggests many SME’s will look to change lenders if interest rates move, their survey also indicating that SME’s are looking for better service and turnaround times. This bodes well for the alternative finance sector which not only offers the latter, but a transparent fee structure and no collateral requirement.
There are 2.1 million SMEs in Australia[iii]. and 51 per cent have no business funding product [iv] Post GFC, the SME sector has cited access to finance as an issue their businesses face, and –as observed in the UK and the USA [v]– this has constrained investment and economic growth. This survey supports these market observations with 27 per cent of SMEs stating ‘cost of finance’ and ‘availability of finance’ as major challenges for their business.
Based on the Banjo Survey 80 per cent of SMEs will likely be approved for an alternative finance loan, compared to approximately 1 in 5 from a traditional bank. Indicatively, for every 10 SME’s applying for bank funding, two were successful, one was unsuccessful and 7 chose not to apply for various reasons including cost and collateral requirements.
“ There are still too many hoops to jump through when applying for traditional finance,” says Andrew Colliver, an ex senior NAB banker now CEO of Banjo Loans.
“Too many SMEs rely on cash flow and family debt and don’t apply for funds from traditional lenders because it’s simply too difficult,” says Colliver.
He notes alternative financiers don’t take uncalculated risks with loans. Rather, they often have more detailed checks and balances when credit checking, thoroughly assessing the health of a business. “This enables us to approve more loans without needing to rely on collateral at all.”
The results found 25 per cent of businesses surveyed missed an opportunity because of a lack of funding, a situation that is all too common in Australia, says Colliver. “Lending is a necessary part of supporting investment and growth, SMEs are screaming out for more accessible lending products.” The Banjo Survey indicated SMEs found access to traditional finance ‘too strict’ and ‘too expensive’.
The research is based on an online survey with the financial decision-makers of approximately 850 Australian micro to small businesses with fewer than 50 employees, conducted in December 2015 and January 2016. The sample base is reflective of the Australian SME market geographically, by legal type, industry size and composition, as revealed by ABS data.
[ii]RBA D7.3 Total credit outstanding by size and sector
[iii] ABS Counts of Australian Businesses 2014
[iv] Australian Centre for Financial Studies, Financial System Inquiry 2014
[v] The UK Alternative Finance Industry Report 2014