Small busi­ness: An­thony O’Brien

Fin­tech firms take the frus­tra­tion out of se­cur­ing funds

Money Magazine Australia - - CONTENTS - An­thony O’Brien is a small busi­ness and per­sonal fi­nance writer with 20-plus years’ ex­pe­ri­ence in the com­mu­ni­ca­tion in­dus­try.

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.

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