Business financing is about more than just achieving the capital needed for growth. It is about developing a relationship with a broker or a lender that can stand the test of time, and that can connect SMEs with the benefits of Australian alternative finance
Let's explore this more deeply, and find out why increasing numbers of SMEs are opting to develop these all-important relationships.
Why building relationships with lenders is a good idea for SMEs
Business owners know that effective growth requires capital from outside of their personal resources. This means establishing trust between themselves and their lender, or another source of external capital.
When this mutual relationship grows stronger, the lender and the client are able to identify the right opportunities to enhance their financial position, through good and bad times. This is the direct opposite of the pejorative term "fair weather banker" -- i.e. a lender who provides an umbrella during sunny days and takes it away when the rain starts to fall.
This has always been the way. Historically the lender was the "primary" relationship for the business, providing consultation and advice as well as straight-up capital. These lenders were able to translate the quantitative and qualitative factors of their client's business, and then use this as a means to get funding approved.
This kind of close personal relationship is becoming increasingly difficult for big banks, who prefer to apply one size fits all products and terms to SME business segment.
The decline of the SME banking relationship
It is this "dehumanisation" of the banking sector that has driven so many SMEs away from traditional lenders. Banks now rely upon rigid risk models when deciding whether or not to approve a finance package, and are unable -- or unwilling -- to get to know the candidates on a more personal level.
SMEs are the driving force of the Australian economy and represent a diverse array of business entities with a similarly diverse variety of needs and prospects. Instead of recognising this, most banks now treat SMEs as a segment -- as one homogeneous whole -- which puts businesses at a serious disadvantage when they try to secure funding.
This problem is underscored by the decision taken by several banks to remove relationship management coverage for SME exposures below $1m, and centralise the ‘management’ of these customers through call-centre style platforms. Even with SMEs that enjoy the services of a 'relationship manager', these services tend to be covered by a banker with a portfolio of as many as 200 customers -- double the level it would have been pre-GFC. It's easy to see why the quality of such a relationship would suffer.
The decline of SME relationship banking has allowed new players to enter the scene -- players that can work with the individual requirements of their clients, and use a more human approach combined with the best of technology as an enabler to achieving the capital funding that SMEs so sorely need.
The rise of brokers working with SMEs
One of these players is the broker; a third party entity who acts as a go-between for SMEs and lenders. In 2007, only 10% of commercial borrowers were working with these brokers, with the rest viewing them either as unnecessary or as an unwanted extra cost. By 2019, this figure had risen to 40%.
So what is changing?
One key factor is a shift in the perception of broker services in terms of value. When we consider the SME-lender relationships discussed above, and how these relationships have suffered in recent years, we begin to see working with a third party broker -- someone who is better equipped to develop this real, mutually beneficial relationship -- would become more attractive.
Another factor is that it is becoming difficult for SMEs to secure funding via traditional means. A broker can open up a world of other possibilities for businesses, greatly increasing their chances of achieving the line of credit they need. But what exactly are these alternatives, and why are they so valuable for SMEs?
The position of alternative lenders
Tighter credit conditions have made it more difficult for Australian businesses to secure the funding they need. Traditional lenders have become more cautious when working with SMEs, leaving a hole that has been filled by newly created lenders and digital banks.
Among this new crop of lenders are Judo Bank and Banjo Loans; two of the players in the new Australian SME financing market. These lenders are not only better positioned to provide the necessary capital, but also to operate the close working relationship that SMEs need.7
The above shift in thinking is reflected in Scottish Pacific's SME growth index, reporting that the percentage of SMEs who look to big banks for growth funding has halved in five years, dropping from 38% to 19.5% since 2014. The report states;
“The top three frustrations involve loan conditions (just over 80%), having to provide property security (79%) and loan inflexibility (73%). And more than 91% of SMEs would be prepared to pay a higher rate to obtain finance if they didn’t have to provide real estate security.”
The funding environment is changing, and relationships between SMEs and lenders are evolving to match this new ecosystem. For Kevin Wheatley, one of Australia's top commercial brokers, the reasons behind this are obvious;
“When you’re in this environment and institutions have tightened, this is where you have really got to apply yourself and look at where alternative funding streams can come from.”
It is worth noting that, in the first six months of 2019, 80% of the funds Wheatley has secured for his clients have come from private sources or non-bank institutions.
So where does this leave SMEs in a changing world where traditional banks are changing their business models?
Well, in light of this evidence, we can see that small business need to be more open to alternative forms of capital. This means working with lenders and brokers who can not only secure this capital but can build a strong, lasting relationship with their clients, whatever the financial weather.
Those lenders and commercial brokers that focus on placing the customer at the centre of everything they do irrespective of external macroeconomic factors and events -- those alternative financiers and brokers who can and do build strong relationships based on mutual integrity and honesty. It is these entities that Australian SMEs will be partnering with for their growth.