Balancing the books for SMEs

by AB11 Feb 2019

Supporting SMEs and bringing transparency to fintech lending is no easy job, but it’s all in a year’s work for OnDeck. Global CEO Noah Breslow explains

THERE’S no shortage of facts and figures on the Australian SME sector.

With more than two million active enterprises nationwide, the sector employs 44% of Australia’s private, non-finance workforce and contributes 57% of total GDP.

However, while some statistics are astonishing, others are simply alarming. For example, 60% of the country’s SMEs fold within three years of launch.

The primary reason? Cash flow.

Although profit is a fundamental goal in running a business, the majority of SME owners and directors who work for themselves are motivated more by a desire to pursue a passion than by money.

The result is that, when they need additional lines of funding, they are vulnerable to making choices that could undermine future profitability, for example by using high-interest credit cards to make ends meet.

When sourcing finance, research by OnDeck shows that SMEs are traditionally reliant on mainstream banks (63%), specialist financiers (29%), credit unions (27%) or family and friends (27%).

While these choices have expanded over recent years as Australia’s fintech lenders have gained prominence, a lack of transparency and regulation around the products offered by some non-bank lenders has undermined the reputation of the sector.

Now, OnDeck Australia is on a mission to reverse that trend while bringing simplicity and transparency to the online SME lending space through a new, tried and tested tool.

The SMART Box – which stands for Straightforward Metrics Around Rate and Total cost – presents business borrowers with the loan amount, disbursement amount and total repayment amount, as well as the terms of their loan, expressed in months.

Definitions of various loan features are also standardised across participating lenders.

Devised by the Innovative Lending Platform Association (ILPA) for use in the US and Canada, the Box has been utilised by SMEs since October 2016 and debuted in Australia on 1 January this year.

Its introduction is one of a series of developments outlined in the Australian Finance Industry Association’s Code of Lending Practice (COLP), designed specifically for fintechs and signed by seven of the most prominent, including OnDeck Australia, in July last year.

“The SMART Box provides a level of transparency for business borrowers in Australia that is not currently offered by traditional lenders,” says OnDeck’s global CEO, Noah Breslow. “The cost of the loan is expressed using different metrics, such as APR and total interest, meaning business owners can easily compare competing unsecured loan options on an apples-to-apples basis.”

As a leading force in the cohort of COLP signatories – and a founding member of ILPA – OnDeck Australia is both an architect and early pioneer of the SMART Box.

 “The transparency created by SMART Box builds trust and confidence in the sector, as a strong alternative to the traditional banking offer. This is particularly important with a relatively new industry,” says Breslow.

Smart, responsible, informed

There are many reasons why SMEs seek finance, from new equipment requirements to new staff. For brokers considering the options available to their clients, there are two common themes to consider: growth and challenges.

“The first reason to seek funding is when a business is looking to grow and expand, for example when looking to purchase additional stock, renovate a space or engage in additional marketing.

“The SMART Box provides a level of transparency for business borrowers in Australia that is not currently offered by traditional lenders”

The second is when a business faces an unexpected challenge that requires funding to solve, for example when a machine breaks or there is an unforeseen environmental event,” Breslow says.

 Unlike mainstream bank lending, the online SME finance sector is largely unregulated – but that hasn’t hindered its growth. OnDeck’s research shows that the SME lending market in Australia is growing at a faster rate than the US market did at a similar stage of development: 37% annually to be precise.

This is due in part to the changing dynamics of the credit landscape. As the banks have stepped back from business lending, the fintechs have stepped up to meet growing demand, wooing businesses with the ability to provide ‘instant’ approvals, low-doc applications and competitive rates.

In fact, Australia has overtaken Japan to become the second-largest alternative finance player in the Asia-Pacific region, right behind China.

“Internet and mobile-based lending platforms are transforming how small businesses access and secure financial services by increasing efficiencies, decreasing transaction costs, improving customer experiences and promoting greater financial inclusion,” says Breslow.

 “Through technology, automation and data analytics, OnDeck can underwrite and fund a small business customer more efficiently than traditional banks.”

While many fintech lenders meet their promises, some have made the terms and conditions around their loan features deliberately opaque, damaging the sector’s reputation as a result.

The idea behind SMART Box is to provide an “exceptional level of transparency” for SMEs looking for funding, thus helping business owners make informed choices regarding their options. “Transparency builds confidence and trust in the sector.

It provides a level playing field for small business owners to compare alternative offers from competing providers; and, along with awareness and credibility, transparency is a key pillar of a well-governed and responsible fintech sector,” says Breslow.

The SMART Box is a simple solution to a complex problem. Crucially, it keeps credit moving at a pace that matches that of the businesses it serves. “Long processing times prevent SMEs from taking advantage of near-term growth opportunities and being agile in their day-to-day operations,” says Breslow. “Online lenders solve this challenge by providing smart, efficient application, underwriting and funding processes that can deliver funds to SME owners in as little as 24 hours.

We can move at the speed of their businesses.”

Leading by example

For OnDeck the SMART Box is just one recent milestone.

 Last year the lender marked 10 years of global operations, during which it has loaned more than US$9bn to more than 80,000 SMEs in the US, Canada and Australia.

In July, OnDeck Australia secured a new asset-backed revolving credit facility worth $75m from Credit Suisse, and in October it announced the addition of a secured equipment finance product for loans between $10,000 and $100,000, with repayments between 24 to 48 months.

As Breslow hints, there’s plenty more to come.

“There is no doubt the Australian market will continue to mature in the coming years. I’ve been fortunate to visit Australia since launching OnDeck here, and on each visit I can see the progress the industry is making,” he says.

“One example is that both the Code of Lending Practice and SMART Box were agreed and implemented within a 12-month timeframe in Australia, and at a much earlier stage in the industry’s life cycle than what we experienced in the US.

” While the banks’ lending criteria, the royal commission and a host of other political and economic factors continue to shift the market dynamic, the role of online SME lenders is growing by the day, and, as Breslow predicts, it’s a trend that’s here to stay.