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Alternative lending – the long and short of it

Altloan

Small business owners are each a jack of all trades – they’re CEOs, marketers, sales guns and customer service gurus all rolled into one (somewhat tightly wound) package. With their fingers in so many pies, the challenge becomes keeping on top of the new stuff – the emerging trends and technologies.

With that in mind it’s no surprise that research by East & Partners found 39% of businesses in the micro and SME segments could not recall a single FinTech brand. That number would decrease if they’d been asked to name an alternative finance provider.

As a small business owner you may have been turned down by the bank when applying for a loan – Australian Bureau of Statistics data indicates that small business loan applications are rejected at roughly twice the rate of medium-size businesses.

Why? Because the banks think the SME lending game is too risky and costly.

Alternative lenders take a different approach. They look at booming small businesses and recognise growth potential. These providers assess risk in an innovative way, measuring real-time performance rather than relying on outdated receipts and invoices. These lenders utilise lean-tech infrastructure and have created self-learning algorithms, enabling them to effectively service small business.

Why small business matters

SMEs drive the Australian economy, making up over 96% of privately held businesses and employing around 70% of Australians.

Scottish Pacific recently found that although the majority of SMEs are experiencing a period of growth, most don’t know where to go for business finance and have turned to personal financing instead. Scottish Pacific found that 65.4% of SMEs were resorting to personal finance solutions (including high interest credit cards) to fund their businesses.

Thanks to the FinTech boom, there are now plenty of options available to SMEs when it comes to financing their business and none involve a personal credit card.

Alternative finance offers greater access and choice

Alternative lending refers to the wide range of options available outside of the traditional banking ecosystem. The alternative lending industry has grown in leaps and bounds over the last few years, offering technology based solutions to old problems.

In Australia the alternative finance sector as a whole is worth $348 million USD, with an annual growth rate of 281% – that’s according to a recent report by KPMG. Balance sheet lenders are leading the way, with $120 million of the market share.

These numbers, more than anything, show that alternative lending solutions are in demand and that SMEs have found that alternative solutions work well, if not better, than traditional banking solutions.

In Australia you will find:

  • Balance sheet lenders – these businesses operate in a similar manner to the banks but have developed their own approach to assessing risk. Often these businesses will lend on an unsecured basis – meaning they don’t require assets or guarantees.
  • P2P marketplace lenders – these marketplaces connect businesses looking for finance with individuals or institutions with funds to invest.
  • Invoice finance – these businesses purchase invoices or receivable notes from a business at a discounted rate.
  • Crowdfunding –these platforms provide entrepreneurs with the opportunity to connect to thousands of potential investors in the form of loans, shares or even a donation.

How does alternative lending help SMEs?

Alternative lending solutions are filling a gap in the market and offering a viable solution to Australia’s small business economy. An alternative loan can help a business to manage working capital, hire new staff, purchase inventory, run marketing campaigns or fit out a store.

Asking for a loan isn’t, by any means, a bad thing – especially in business where growth often requires some debt. However, finding the right lending solution for you and your business can be a difficult task because there is such a wide range of products available!


About the author

Lachlan_HeusslerLachlan Heussler is the Managing Director of Spotcap Australia and has more than 15 years’ experience in financial services, both in Sydney and New York. He has witnessed the profound impact technology can have on financial services and is passionate about using technology to support Australian small businesses. Find him on Twitter (@LachlanHeussler) and LinkedIn