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theBankDoctor, Neil Slonim, runs an expert eye over what business owners should know about the non-bank lending sector

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Neil Slonim founded theBankDoctor in 2013 as a not-for-profit online resource centre to help small business owners better understand the wide range of funding options available so they can choose the product and lender that best fits their needs.

Neil was one of many industry advocates consulted to provide expert input into the joint ASBFEO/Scottish Pacific Business Funding Guide, and he very kindly sat down with Scottish Pacific to give his insights into SME finance and the non-bank lending sector.

 

Q: Do you think business owners have a good understanding of non-bank lending options?

Neil Slonim: Since founding theBankDoctor I’ve closely followed the development of the non-bank lending sector.

This sector has a huge opportunity to solve the SME funding gap for businesses that don’t have property security, have a less than perfect credit history, have not been trading for long or want to borrow an amount too small to interest the big banks.

I’d say over time awareness of non-bank funding options has certainly improved.

However, awareness is just the first link in the chain. The next phase is to actually understand these options. Finally, the third phase is to act on this understanding.

 

Q: What needs to happen to move business owners from awareness to action?

Neil Slonim: It’s easier said than done.

One of the main reasons non-bank SME products have not gained the traction they should have is that many business owners don’t have a level of understanding that would give them the confidence to dip their toe in the water and borrow from a non-bank.

Understanding all the options is not easy, and this has inhibited SMEs’ take up of alternative funding products and suppliers.

If I find it hard to navigate all the different options, and I’m working in this space, how hard must it be for a business owner who is not a finance expert?

 

Q: So researching non-bank funding gets put in the “too hard” basket?

Neil Slonim: It does, and SME owners usually don’t address funding requirements until, or unless, there’s a significant event in the business.

This could be a problem, like the loss of a major customer, or it could be an opportunity, like receiving a big new order. The significant event triggers a need for funds, often at short notice.

If they’re rejected by the bank or they can’t get a prompt response from the bank, they have to make a quick decision about other funding, often without the appropriate level of investigation or consideration.

For better or for worse, a business owner knows what to expect when dealing with a big bank.

With a non-bank, especially if it’s one that is new to the market, the SME owner doesn't have the same base-level knowledge.

They should look into the lender’s track record, how they operate, what interest rates they charge and whether higher rates are offset by other benefits. But this all takes time and effort.

 

Q: Is this why you think the Business Funding Guide is useful?

Neil Slonim: Yes, I was happy to provide input into this initiative because it is all about addressing understanding, trying to spell out to SMEs and their advisors how different products might be right for different business situations.

It’s saying to SMEs and their advisors, we know you’re more aware of alternatives, but do you really understand how they work?

Business owners usually consider funding outside the banks when they think they won’t be able to get bank funding or it will take too long. But more often than not, they tend to squeeze their trade creditors, delay paying ATO obligations, max out credit cards or borrow from family and friends.

In the absence of any urgent need, they are so overwhelmed in their business to spend time thinking about its optimal funding structure. They are unsure, and don’t know which way to go - so they tend to do nothing.

 

Q: How important are accountants, brokers and other trusted advisors in this process of educating about funding options?

Neil Slonim: Accountants, brokers and other trusted advisors need to keep abreast of developments in SME funding so they can help guide their clients in a way that genuinely builds on the client relationship.

It was interesting to see the results of Scottish Pacific’s latest SME Growth Index, and the fact that SMEs nominating accountants as their most trusted advisor has halved since 2017.

One explanation for this could be “doctor Google”. For younger business owners, I think there’s a tendency to go straight to the internet and when they search they are likely to come across a wide range of resources including those offered by  https://www.business.gov.au/Finance, ASBFEO and theBankDoctor.

In addition to finding help online, many tend to rely on peers rather than seek a local accountant or broker who could be just the person to help them.

 

Q: What are your thoughts on how SMEs should fund growth?

Neil Slonim: A growing company should be wary about taking on a short-term amortising loan because you can’t fund a growing business if you have to start paying back the debt the day after you borrow.

Maybe growth companies are waking up to this and thinking “would I be better off finding a line of credit where I can choose when and how much I draw down and repay?”.

For many growing businesses who offer their customers credit terms, debtor finance could be the best option – if you’ve got the invoices, you’ll get the money.

Foremost though is to have a solid capital base. Lenders aren’t likely to support a business if the owner has little or no “skin in the game”.

 

Q: Why do most SMEs still use property security when they say they’d prefer not to?

Neil Slonim: Small business owners have so much going that unless something is really going to impact them, they tend to let it ride. It’s the same for their advisors. 

Of course, business owners would prefer not to have to use their personal property as security, but they may have reservations about how an unsecured loan from a non-bank  differs to a secured bank loan. And its not just about the interest rate, there are other factors to consider like fees and what happens if things don’t turn out well.

It takes a lot of time and effort to navigate the myriad of options that are now available to SMEs so unless the need is significant, urgent and a ready solution is at hand, the tendency is to just muddle through by squeezing trade creditors, delaying paying ATO obligations, maxing out credit cards or borrowing from family and friends.

There’s a lack of understanding around the issue of pricing for risk. SME owners who put their house up as loan collateral know that if they default they can lose their house, whilst the bank almost always gets their money back.

Many don’t realise that with unsecured loans if the borrower defaults, the lender will suffer too, often to the tune of 100 per cent of the debt.

The other issue is that business owners aren’t comparing like with like if they are just comparing interest rates rather than other factors when it comes to bank and non-bank lenders – they should also be comparing factors such as decision-making lead times and simplified approval processes.

However, when there’s too many variables to compare, it’s human nature to revert to price and what’s ‘cheaper’ or ‘less’ – but that is like comparing apples with oranges.

I think that SMEs need to see independent, positive stories in the media about how non-bank funding can and does work. That will help make it relatable to them.

Declining home ownership rates, especially amongst younger small business owners means that for many a business loan secured by property is simply out of the question. The same is true for those who do own property that is already fully leveraged.

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