Bank limitations create opportunities for non-bank lenders

Winners and losers from new bank regulations

Small and medium sized enterprises (SMEs) are the lifeblood of an economy, but given the changes to bank regulations the sector is increasingly a ‘loser’. In Australia, SMEs employ around 70% of the workforce and produce around 55% of business economic activity. However, two key changes continue to push SMEs out of the bank lending market:

1. Cost – under Basel III, banks must hold higher levels of capital against SME lending, including low-risk loans backed by residential or commercial property. This makes lending to SMEs more ‘expensive’ for the banks, and hence they pass the cost onto the SME borrowers.

2. Time – SMEs often require expedited funding. However, the ever-growing level of regulation and compliance that bank officers must comply with results in turnaround times that are typically weeks or even months. Even the highest quality loan application takes time to go through the process.

For example, if a clothing retailer is offered a 30% discount on the usual price by a wholesale supplier on Thursday, provided they place an order by the end of the week for $100,000, the retailer is happy to draw on say, a three-month loan paying 15%. The three-month interest cost on $100,000 would be $3,750 versus a potential increase in the profit margin of $30,000. This loan may also have security over the company’s assets and have directors’ guarantees or a mortgage over the owner’s home.

These high-quality SME loans (often fully secured) are leaving the banking sector in droves. The burgeoning fintech, peer-to-peer, and non-bank lending sectors are the perfect destination for SMEs. Simple, quick, and transparent processes and ultimately, access to funding in just a few days as opposed to weeks or months is what SMEs desire. And they are happy to pay up for such a service.

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Source: Bank limitations create opportunities for non-bank lenders – Cuffelinks