Large banks to be toppled on SME funding

Alternative lenders are tipped to overtake banks as the key source of growth funding to smaller businesses by 2020.

Alternative lenders tipped to overtake banks as the key source of growth funding by late 2020.

The dominance of large banks in the small-and-medium businesses market could be under threat, as new research tips that alternative lenders will overtake banks as the key source of growth funding by late 2020.

The findings come amid heated debate about an array of challenges in the small business lending market to secure finance, particularly when property isn’t provided as security.

The research by working capital provider Scottish Pacific and East & Partners — which surveyed 1257 businesses — found just 19.5 per cent of respondents said they would approach their main bank for loans to fund growth.

That is down 3 percentage points from September and the figure has tumbled from 38 per cent when the research started being collated in 2014.

The numbers are also congruent with anecdotal evidence of frustration in the market with the big banks taking a more cautious approach to credit, with Treasurer Josh Frydenberg urging lenders in recent months not to stem the flow of business credit.

East & Partners predicts that if the downward trend in its survey continues, alternative lenders will overtake main relationship banks as the key source of growth funding by the second half of 2020.

Scottish Pacific chief executive Peter Langham said a number of factors, including the banks’ approach to serviceability and a slump in national house prices, was having an impact on where businesses turned to for loans.

“The index really supports a lot of things that we know, we know they (small business owners) are time poor,” he said. “They are becoming increasingly open to non-bank alternatives to fund their operational and strategic growth.”

But banks like National Australia Bank — the nation’s largest in business lending — may beg to differ as it protects its patch by introducing measures such as QuickBiz, which facilitates quicker approvals for unsecured loans of up to $100,000.

The small and medium business lending market is worth about $300 billion, although debate has centred on a funding gap in the market estimated by start-up lender Judo Capital at about $83bn.

Mr Langham doesn’t agree that the gap is that large, but he notes there is a sizeable shortfall.

He said the emergence of new players in small business lending could only be positive for borrowers, despite some taking “a lot more risk” than established companies.

“The options are increasing which is great,” Mr Langham added.

The research, which was conducted from November 2018 to January 2019, also found that 65.1 per cent of small business would definitely be prepared to pay a higher interest rate on their loan if they didn’t have to put up real estate as security.

The small and medium business sector is caught up in the house price spiral, as many rely on their home for collateral when borrowing to grow their company.

The 2019 federal budget papers outlined the consequences of a 10 per cent fall in house prices, saying such a drop would trigger a 0.5 per cent decline in real GDP growth.