Just don’t call us payday lenders
More than 20,000 Australian small business owners have trouble accessing finance (Deloitte Access Economics).
Are they denied access because they aren’t good candidates for loans? Yes, in some cases. However, a significant number (37%) of these businesses are denied finance because they don’t have collateral (be it a home or considerable assets) to secure a loan against.
Interestingly more than 40 per cent of rejected applications examined by the NSW Business Chamber were for amounts less than $100,000 – it seems traditional providers aren’t interested in small loans, or small business.
Archaic systems and processes which serve the interests of incumbent big business are being dismantled in the current global disruptive landscape. Like consumers, small businesses are set to benefit from these changes, particularly when it comes to accessing finance. The FinTech lending industry has made finance more accessible for creditworthy small businesses with growth potential.
As with all emerging industries, there are concerns around privacy, security and regulation. Comparisons have been and will continue to be made between online alternative finance for small business and payday loans. While characteristics such as speed, access and to an extent price are common, there are a number of distinct differences between the two financial products.
What sets alternative finance and payday loans apart?
Alternative SME finance allows small businesses, typically shut out of business borrowing, to access finance to innovate and grow. The ABS recently found access to finance was a key barrier to innovation for at least 20 per cent of small businesses. These loans typically have shorter-terms between six months and two years and are accessible online.
A payday loan is a small, short-term consumer product which typically requires full repayment be made within a very short time frame, (the name actually comes from loans being deducted on a consumer’s payday). These loans incur significantly interest rates than personal loans from traditional providers but are much easier to get. In fact a payday lender might not even conduct a credit history check from an applicant and that is a key difference between the the two financial products.
Although alternative finance is easier to obtain than a traditional business loan, most reputable alternative lenders have stringent credit assessment processes. Although these lenders often don’t ask for security or 5-years’ worth of business data, real-time information about cashflow and business performance is required.
Alternative lenders assess a wide range of public and private data in the credit assessment process. Enabled by technology, they can conduct a thorough assessment of a business, often within a few hours. Although the process is largely automated, these lenders often have a team of credit experts to review datasets, consider if a loan is right for the business and if so, determine the most suitable terms and conditions. The process may be fast, but it is not simple.
Consumers who take out a payday loan often do so as a last resort, and feel they have no choice but to agree to poor terms. Although some businesses approach alternative lenders because they are shut out of the traditional lending ecosystem, they’re not in a state of desperation. Historically our customers have come to us to elevate the day-to-day operations of their business – they want to run a new marketing campaign, open a new shopfront or produce an innovative a product line, not to stay afloat.
In an ideal world all alternative lenders would adopt an ethos of open and honest communication when it comes to sharing terms with borrowers – this is certainly something we ascribe to – however more can be done to protect small businesses. It’s quite clear we can’t rely on businesses driven by revenue and profit margins to behave ethically. We can already see lack of regulation within the alternative finance sector in Australia has led to some unethical behaviour by outlier businesses looking to turn a profit at the expense of small business.
We can’t deny the behaviour of a few outlier lenders reflects poorly on the industry and breeds misguided comparisons between alternative finance and payday lending. Something can and should be done to ensure ethical players can continue to support small business while reining in rogue lenders.
Regulate to move forward
The solution is regulation. As a business we have voluntarily and proactively obtained a credit license from the Financial Conduct Authority in the UK, a market far more advanced than Australia when it comes to regulating the emerging alternative finance industry. The FCA model will be replicated and adapted internationally as governments worldwide begin to regulate the emerging FinTech industry.
Although some players may shy away from regulation, concerned it will hinder innovation, we welcome it. It affords greater consumer protection and establishes trust and credibility for the sector.
Regulation, if done right, can ensure emerging industries continue to flourish while protecting the interests of consumers and small business owners. As a relatively new lender in the Australian landscape, we’ve experienced reasonable growth since our launch. We aren’t at a point where we can afford pricey advertising campaigns and have no interest in taking on risky loans. We’re in the business to help an underserved, yet deserving group of Australian small businesses that need a helping hand to achieve their goals. We aren’t and will never be a last resort lender.
As an alternative lender we can’t disguise our own agenda. We want to see the industry thrive and we make no apology for that. Our unsecured business credit line and loan products are integral to the ongoing economic growth of Australia’s two million strong small business community.
– by Lachlan Heussler, Managing Director of Spotcap Australia