Non-bank lending emerges as top choice for SMEs

By Sophia Auld – journalist

The figures are out: Australian small-to-medium enterprises (SMEs) are increasingly turning to non-bank lenders to fund their business activities. Options on the table include trade, invoice, and equipment finance, among many others. If you’re thinking about getting finance, it’s important to find a solution that fits your business needs and goals.

Non-bank lending plans double over four years
While banks are known for business lending, the latest SME Growth Index compiled by ScotPac, Australia’s leading non-bank business lender, found the number of SMEs planning to borrow from non-bank lenders has doubled to 31% over the past four years. This means SMEs’ preference for non-bank borrowing now exceeds that of bank borrowing, which declined by 4% year on year to 28%.

Furthermore, 55% of SMEs are planning to invest in their business in the next six months, with Scotpac CEO Jon Sutton saying this was a pleasing sign of confidence in the current economic climate. In 2022, 41% of SMEs will seek new funding options, on average applying for $753,000.

The trend has been driven by the loan approval speed of non-bank lenders, which is generally twice that of banks. ‘The feedback from SMEs is clear,’ Mr Sutton said. ‘They want fast and responsive loan application turnarounds, and hassle-free financing that matches their business needs.’

Non-bank funding options
Non-bank lenders are typically more flexible and have a different risk appetite to banks. They also tend to be more specialised, offering a range of funding options that can sometimes better suit SME. These options include:

1. Invoice finance

Also known as debtor finance, this option allows businesses to unlock capital in unpaid invoices. It works by assigning receivables to the lender, who then provides a cash advance of 75-95% of the value of outstanding invoices. This bridges the cashflow gap that occurs between incurring expenses and receiving customer payments.
Advantages include rapid access to funds, which can allow you to capitalise on growth opportunities, and no need to use property as security. It is only available to B2B businesses, and costs may be higher for new or higher-risk businesses.

2. Trade finance

This option can help your business buy goods or services and is great if you’re not offered credit terms by local or overseas suppliers. If you’re an importer, it provides funds so you can pay a supplier before goods are received, sold and turned into cash. For exporters, it provides working capital until your overseas customer pays for the goods or services delivered.

This option allows SMEs to pursue growth opportunities and doesn’t require personal property as security. It does, however, require a strong financial track record and can become costly if payments are missed.

3. Online small business loan

This involves borrowing a lump sum and making fixed payments over a set term. The principal is paid back by the end of the agreed term, with interest payable on the unpaid balance. Application and funding are usually fast. This type of loan can be helpful for one-off purchase, marketing blasts or business expansion. However, a fixed repayment schedule can be challenging for some SMEs.

4. Equipment finance/leasing

With this option, the lender provides finance for your business to purchase equipment such as vehicles, computers, plant and machinery. The equipment becomes primary security for the facility and the lender sets your repayment schedule.

This option can enhance cash flow and enable you to acquire equipment without a large upfront payment, without needing property for security. Be aware that equipment finance can cost more, and penalties may apply for contract terminations.

Contact us to see which finance option is best for you.

Feel free to contact us for anything that relates to your business finances so we can help with your success.

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