With business confidence at its highest rate since before the GFC, Australian Broker hears from the lenders innovating small business finance
QUESTION: What are some of the most common reasons for small businesses seeking finance?
Matt Bauld: Small businesses need finance for a whole range of reasons: from managing cash flow because customers are slow to pay their invoices, to borrowing for expansion or taking advantage of seasonal discounts from suppliers. The one thing small businesses all have in common is that accessing funding from their banks can be difficult or even impossible.
Chris Thomas: The headline reason is that the growth mindset we see in the current environment results in strategies that are all about expansion. If you get into the detail of that, you have finance requirements to purchase assets, whether they are buildings or machinery, that generate revenue for business owners. Equally, you have business owners looking to support their cash flow needs. As the economy grows you will find there is a need to fund working capital, and we see that as a growing part of the finance industry.
Michael Burke: The results of OnDeck’s Small Business Owners Survey in April 2018 showed the top three reasons small business owners seek out loans are to fund equipment purchases, manage cash flow (36%), and purchase inventory (32%). Demand is also increasing overall, with 25% of the small business owners we questioned confirming that they planned to seek additional finance over the next 12 months, and 33% planning to look to online lenders for that finance.
QUESTION: From your perspective as a lender, what are the key trends in small business finance that currently drive yuor product development and innovation?
Matt Bauld: Given that the ongoing nature of the role of mortgage brokers is being questioned at the moment, it makes sense to consider spreading your risk by diversifying. The Prospa team spends a great deal of time and effort working directly with partners in a collaborative way, which heavily influences the products and tools we build. By asking questions and really listening to our active partners, we can be confident we offer genuine value for them and their customers who are small business owners. For example, in direct response to requests from our channel partners, we’re currently creating a tool to support and guide brokers through the process of helping clients secure bigger-ticket loans that require a different application and approval process.
We’re also working continuously to reduce our cost of funds. Prospa has reduced its rate cards twice in the past two years. This was made possible by the cost-of-funds and operating leverage improvements achieved by the business as it has scaled. These price reductions have been strategic to increase the reach of the small business loan product and drive greater volume through the platform. Prospa will continue with this strategy of optimising funding and operations and investing in price for as long as it makes economic sense to do so. Lastly, we are conducting an IPO to raise money to further develop our products, geographies and reach so we can further enhance our market leadership and drive even more value to our partner network.
Chris Thomas: They key trends are around speed and access to capital. With QuickBiz NAB is providing brokers with an online decision instantly so they can provide clarity for their customers around the application progress and outcome. Equally, upon execution of the loan it will provide funds to the business owner within one business day. So it’s about providing working capital and business funding and rapid relief to support business owners. They are time-poor and they work with brokers to find solutions more quickly than they have ever needed them.
Michael Burke: There are two primary trends: marketplace partnerships and industry transparency and regulation. OnDeck's marketplace partnerships are forged only with the best players and this is critical in the alternative finance space. We have active partnerships with Chase, MYOB and Connective. This allows us to leverage our reach and expertise to deliver competitive and market-leading solutions for small businesses, powered by the agility and speed that online lending supports. It’s the best of both worlds.
The government is driving transparency by opening dialogue on areas like open banking and the enforcement of mandatory comprehensive credit reporting, taking the first steps towards creating a more competitive, sophisticated Australian financial services system.
Chris Thomas, GM Commercial broker, NAB
QUESTION: What are the greatest influences on the smsall business space currently?
Matt Bauld: There’s still a lack of awareness of how big the SME commercial finance opportunity is. Small businesses are the engine of the Australian economy; they represent 97% of business, around 35% of GDP, and employ 44% of Australia’s workforce. Yet it’s often impossible for these businesses to access the capital they need in order to grow and, ultimately, create more jobs and wealth for the whole country. Around a third of small business owners say they have missed opportunities due to a lack of credit. This, more than anything else, is the number one issue affecting small businesses across Australia.
Thanks to the royal commission, we’re seeing an increase in awareness by small businesses that there are finance options available to them that are not banks – which they weren’t previously aware of.
Chris Thomas: NAB does a lot of research with its customer base to understand how they are feeling about business conditions and confidence. What we see currently is that businesses have a real spring in their step at the moment and rate business conditions as the best they have been since before the GFC.
We believe that is for a number of reasons. Firstly, we are seeing a huge amount of infrastructure spending both at federal and state government levels, which means a lot of business activity, and we see that really flowing down through the business chain. Secondly, we are seeing some really positive activity in the mining states, particularly Western Australia and Queensland.
That provides a really positive backdrop for business owners. We know that there are 2.2 million small businesses in Australia and they are in a growth mindset. We have got further analysis that confirms 73% of businesses are feeling quite successful and businesses are really seeing that the road ahead is positive and they want to continue to remain in a growth mindset.
Michael Burke: Timely access to capital for small business owners is always challenging. Research from Scottish Pacific shows that one in five SMEs are unable to take on new work as a result of cash flow restrictions, and nine out of 10 say increased capital could improve their revenue by 11.7%. When you multiply that by the number of small businesses in the market, there is a huge opportunity to grow the economy just by simply providing better access to capital.
Since 2013 KMPG has recorded a CAGR [compound actual growth rate] of 79% in the online small business lending space and anticipates a CAGR of 151% through to 2020 as awareness of alternative financial product offerings continues to grow.
Matt Bauld, GM sales and business development, Prospa
QUESTION: What are the key innovations your business has brought to the application process?
Matt Bauld: Prospa has always had the vision of transforming the way small businesses experience finance. Our proprietary technology has enabled us to provide customers with fast, easy access to capital, often within 24 hours.
We invest a lot of money to try to provide fast turnarounds – for example, our proprietary credit decision engine can assess the majority of applications in an average of just 15 seconds. So even if we can’t help, our customers tell us a quick no is better than a long, drawn-out no.
We were also the first to create online tools and platforms for our referral partners, and this combination of first-to-market technology alongside a dedicated partner-facing team across Australia has enabled us to build an incredibly strong channel network.
Chris Thomas: Brokers play a lead role in supporting their customers in accessing finance, and because brokers spend a lot of time helping their customers access capital, NAB is looking at how it can support them in better assisting those customers. A huge part of this has seen us focus on digital innovation, and there are two distinct components to that. The first is ApplyOnline commercial lodgement. We have a digital platform linked through this software, where they can lodge business applications for up to $1m and even combine that with a residential loan to meet commercial and business needs. That digital innovation is a real step forward in becoming more flexible for our brokers.
Our second exciting initiative is QuickBiz, where we are providing a working capital solution for when traditional security may not be available but there is a cash flow need, and we can loan up to $100,000.
We see QuickBiz as going head to head with the fintechs to provide sensible lending solutions in a rapid fashion with fair and reasonable interest rates.
Michael Burke: The first step is understanding the financial health of your business. We have found that 90% of businesses do not know their credit score. This means that many small companies are essentially flying blind and not getting a true picture of the health of their business.
OnDeck’s KnowYourScore is a business-only platform that provides the business owner with an up-to-date credit score in seconds. The service is safe, free and doesn’t leave a footprint, unlike a credit report pulled during a lending application. Powered by Equifax, it helps SMEs and their brokers make informed decisions about their financing options and determine whether they will receive favourable terms from financiers and suppliers.
The typical credit score is 769, and 80% of businesses score good, very good or excellent.
Michael Burke, head of sales, OnDeck Australia
THE BROKER SHARE
Chris Thomas: The broker channel is an important and growing channel for us and currently 70% of the small business lending flows we receive from brokers are new to NAB. We expect to continue seeing that growth moving forwards and we also see the commercial broking market as the most rapidly growing sector of the broker market currently. In response, we will soon follow the launch of QuickBiz with an equipment finance option. It’s interesting how the loan book of any one of our residential brokers is comprised of around 30% SME owners and we see a lot of residential brokers diversifying their business by building strategies around supporting SME customers. While they have borrowing needs for their home, there is a market there for the brokers who have yet to ask that extra question, ‘how’s business?’
Matt Bauld: We typically see around 65% of loans derived from brokers and our strategic partners. Working with a partner like Prospa can help brokers quickly diversify into commercial credit. Leveraging our expertise, brokers can solve problems for their small business clients, work with their customers end-to-end through the transactions, or, alternatively, they can spot and refer a customer to us. We can then look after that relationship for the broker, while keeping them completely in the loop via our online portal. We also provide marketing tools that ultimately help our partners build up their own businesses.”
Michael Burke: We understand that approximately 70% of Australian small business owners access capital via brokers or intermediaries. This is mutually beneficial for brokers and borrowers. The second Asia Pacific Alternative Finance Industry Report by KPMG, which is based on historic trends and business sentiment, confirms there is potential for $2bn in loan originations just here in the Australian market to 2020. This will provide significant opportunity for brokers to build their small business portfolios and diversify their businesses at a time when the SME space in Australia is thriving.