Alternative lending is changing how businesses are borrowing

By Paul Redfern | 13 Jun 2019 View comments

It’s frequently stated small to medium businesses (SMBs) are the engine room of the Australian economy. They make up more than 99 per cent of all Australian businesses, contribute $380 billion to the economy and employ more than 5.5 million people. So it’s not an understatement to say that access to funding is critical not only to their success, but also that of the Australian economy.

Traditionally, SMBs have turned to banks to help fund their everyday operations and facilitate growth, but alternative lenders have also entered the landscape over the past few years. These alternatives often provide funding options designed specifically for SMBs (and some well-suited to certain industries), enabled through technology.

The popularity of these alternative options is growing, particularly given the recent adjustments in house prices and concerns from SMBs around securing loans against personal assets. It has recently been reported almost half of SMBs (44.5 per cent) said property market conditions were already making it harder for them to access business funding.

Should you consider an alternative lender?

As with traditional business loans, alternative lending options should be thoroughly researched with consideration given to the features and potential advantages of each.

There are obvious advantages to secured lending, commonly the size of the loan and the cost to borrow, however this type of funding isn’t always easily accessible to everyone nor is it always the best option for everyone.

Many alternative lending products appeal to SMB’s because they remove the requirement to secure the finance against their personal assets. Many SMB’s are reluctant to secure against their personal assets, while a fluctuating housing market has created a barrier even for those who are prepared to secure against their home.

Hence, alternative lending is becoming more popular as SMEs look for ways to access finance to address short-term cash flow, buy new equipment or facilitate growth.

While the barriers SMBs face in accessing timely and suitable funding are all too common; each business has unique needs, circumstances and experiences to manage. The franchise structure may also influence what lending solution you consider or is available to you.

How a franchisor might get a loan

Let’s consider a couple of examples using Tyro’s business loan.

The franchisor of a new burger chain ‘Mega Burgers’ has three company owned and operated outlets in its network and is seeking finance to support their growth. Given a merchant’s eligibility for a Tyro loan is assessed on their EFTPOS transaction history, the franchisor’s assessment would be based on the combined transaction history of the three outlets they own.

But if Mega Burgers has three franchisees each owning and operating one of the three franchises, then the borrowing would be independent for each of them. In this instance, the assessment would be based on the EFTPOS transaction history of the individual franchisees and the loans would be separate. Therefore, it would be in Mega Burgers’ interest to make its franchisees aware of alternative lending options which could support their growth and cash flow.

Some things to consider when assessing alternative lending options

Repayments

It’s important to consider how often repayments are required, how the repayments will impact your cash flow and what the ramifications are for late payments. Alternative lending products are popular among SMBs because their key features are often tailored to suit that type of business.

A good alternative solution should streamline into your business processes and require as little effort to manage as possible. Once again, this is a benefit to most operators, but it is important to consider what works for you before deciding on your preferred option.

Cost

Do your homework on how much it is going to cost you to borrow and what the total amount repaid will be over the life of the loan. Will you have the flexibility to pay off the loan early or will you be charged for this? What is the interest rate and how does it compare?

How much can I borrow?

How much you can borrow will depend on each lender’s’ assessment of your business and your eligibility for a loan, as well as the way the product is designed. Many alternative solutions have been specifically designed to address short-term cash flows or as working capital, which means the amount they lend is often less than a long-term secured loan.

How quickly can I get access to funds?

Alternative lending products for the most part use innovative solutions which do a lot of the assessment leg work behind the scenes, meaning the access to finance is often much quicker.

Traditional loans can require considerable amounts of paperwork and subsequent wait times for approvals, while alternative lenders leverage technology to expedite the assessment process.

For instance, Tyro merchants can accept loans straight from the app due to the fact their assessment is based on their EFTPOS transaction history. They can adjust their loan amount, accept terms and conditions, provide the personal guarantee and have funds available in their account in 60 seconds.

As alternative lending’s popularity has grown, so too has the diversity of products in the market, including certain solutions tailored to retail and hospitality businesses and others tailored to more service-based industries. Which is why it is critical to do your research and not only determine whether an alternative lending solution is right for your business, but also which solution will work best for you.  This is all good news for businesses looking to grow or needing funds to support their cash flow.