Small business: Anthony O’Brien
Fintech firms take the frustration out of securing funds
Small business is a cornerstone of the economy, a fact supported by Australian Bureau of Statistics figures released in February showing that the entry rate of new businesses into the market has never been higher.
As of June 30, 2016, the number of actively trading businesses in the market sector was about 2.2 million, an increase of 2.4% from June 30, 2015. Despite the important role small business plays, the struggle to secure finance – often needed to expand and grow – from traditional lenders, including the big banks, continues. There is an estimated $60 billion of unmet lending demand from small and medium-sized businesses in Australia, according to a recent industry report.
What the lenders want
Traditional lenders require security, a business plan and a 12-month profit and loss report, which is difficult if you need working capital or wish to buy a commercial property but haven’t been in business for long. “The challenge has always been security,” says Tony Haworth, senior partner at AAP Finance Brokers. “It’s also really hard for start-ups that have no profit and loss financials.”
The situation has opened the way for disrupters such as OnDeck Australia, Prospa and Spotcap to fill the void by offering business finance based on cash flow rather than security or risk factors. These fintech firms can be a good short-term solution for securing business finance but Haworth warns there can be traps for the unsuspecting.
“Banks can take at least six weeks to approve finance,” he says. With strict criteria, score checking and a tick-a-box approach, it can be a slow and frustrating process, whereas companies such as OnDeck, Prospa and Spotcap will look at accounting programs such as Xero or MYOB and lend on a firm’s cash flow.
“They can do a 30-day temporary facility or they can do up to 12 months or more, and it can be really quick, just a 24-hour process,” says Haworth. The catch can be the cost, because the finance isn’t secured against personal or business assets. A temporary 30-day facility will cost around 1.5% a month, which is a relatively expensive 18% over 12 months, according to Haworth. Suncorp, in comparison, offers an interest rate of 4.2%pa for a secured business loan, according to AAP.
“Unlike traditional financial institutions, we don’t charge application fees, nor do we charge early repayment fees,” says managing director of Spotcap Australia & New Zealand, Lachlan Heussler. Spotcap’s interest rate charges varies according to each client’s business data and risk profile, and ranges from 1% to 2% a month. “Spotcap only charges interest on the amount borrowed, and a drawdown fee which is paid when a client borrows against their approved credit line,” says Heussler. “If a client is approved for a credit line that they do not use, there are no fees or charges.”
Spotcap lends between $10,000 and $250,000 to its business clients. OnDeck lends up to $150,000 and Prospa offers $5000 to $250,000.
Cutting the red tape
At OnDeck, CEO Cameron Poolman says small business owners needed regular cash injections to grow but spent much of their time either applying or waiting for their banks to approve loans. “We want small businesses to be able to get on with it, eliminating mountains of paperwork and streamlining the application process from four-six weeks to one business day when compared to traditional lenders,” he says.
Haworth agrees that traditional lenders ask small businesses to jump through many hoops. “It’s a very frustrating banking environment, and as a small business you can’t go and talk to a bank manager like you used to. It’s all centralised now and if you don’t fit the square it can be a real struggle.”
Haworth says that for small businesses to succeed long term, they need a good team behind them, as well as a business plan to impress a lender. “You need a good solicitor, accountant, finance broker and an insurance broker, which ticks a lot of the risk boxes lenders will look at,” he says.