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Update: The Australian and New Zealand operations of Bibby Financial Services were acquired by Scottish Pacific Business Finance in late 2015 to create Australia’s largest non-bank invoice finance specialist. Welcome to our website.

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Historically, traditional banks have been key suppliers of working capital for Australian businesses. They were often sufficient for getting financing to buy inventory, purchase equipment, fuel expansion, and so on.

But recent data from Scottish Pacific’s September 2019 SME Growth Index shows main banks are no longer the number one choice for business owners. 2019 was the official tipping point, where more SMEs now prefer non-banks for growth funding. Historically, traditional banks have been key suppliers of working capital for Australian businesses. They were often sufficient for getting financing to buy inventory, purchase equipment, fuel expansion, and so on. 

In this post, we’ll examine the details, explain why non-banks are such a desirable option and discuss some specific funding options that are available.


A Major Drop in Growth Funding from Traditional Banks

There’s been a significant shift in the sentiment among Australian business owners regarding banks in recent years. Back in 2014, the majority of SMEs turned to them to obtain working capital. But the popularity of traditional banks has steadily declined, and 2019 is the first time in five years of the SME Growth Index where the majority of business owners are more likely to use non-banks for financing. 

“Banks have consistently lost ground each round since twice-yearly Index reporting began in 2014, according to the report. “At that stage, 38% of SMEs preferred their main bank for growth funding — this has now halved to 18.3%.”

On the other hand, 18.7% of business owners prefer obtaining funding from non-banks in 2019, giving this option a slight edge. 

East & Partners, a leading business banking market research and analysis firm predicted that this transition would occur before mid-2020. But the threshold has officially been crossed a year earlier in 2019, which indicates a major shift in the collective mindset of Australian business owners. 

On top of that, the number of SMEs who wouldn’t consider using a non-bank lender continues to decrease, dropping from 4% in 2018 to 2.6% in 2019. This research shows that business owners are becoming increasingly comfortable turning to non-bank lenders, and they’re becoming more reluctant to seek financing from main banks.

Primary Reasons SMEs Are Turning to Non-Banks

So what’s the logic behind this transition? What are some specific reasons why SMEs are now opting for non-banks over traditional ones?

To Avoid Property Security 

Hands down, the biggest reason is to avoid property security. In fact, 21.3% of respondents said this was their main motivation for seeking lending from a non-bank lender, which was up from 18.7% in September 2018. 

And this is understandable given the current condition of Australia’s housing market. Data from the Australian Bureau of Statistics (ABS) paints a fairly grim picture where homeownership throughout the country has been on a steady decline over the past 20+ years. In 1998, 70% of households owned a home, but that number has fallen to 66% in 2018 — the lowest it’s been since the ABS launched its data series in 1994. 

Housing prices have fallen significantly, especially in major cities like Sydney and Melbourne. When compared to their peak in 2017, they dropped by 11.1% and 7.2% in January 2019. 

Not only that, the number of households in debt has increased considerably, with 40% having paid off their mortgage 20 years ago. However, in 2018, that number dropped to just 30%. 

When you put all of that together, it’s easy to see why so many business owners are turned off with the idea of having to use property as security. Many simply don’t have a home to use as collateral. And those who do may be reluctant to put it at stake to generate working capital. 

Considering that many loans from non-banks are unsecured, this makes it a more appealing option for many modern business owners. “This round, 19.9% of SMEs independently nominated that another reason they are turning to the non-banks is to avoid using non-property assets or personal guarantees to fund their business,” says the 2019 Growth Index. 

Lack of Regulatory/Compliance Requirements

The second biggest reason is to avoid dealing with the growing number of regulatory and compliance requirements, with this being an issue for 19.8% of SMEs. Many traditional banks aren’t lending like they used to and have a more rigid set of rules that make it difficult to obtain financing. 

Government red tape/compliance was actually cited as the top reason for cash flow issues among nearly three quarters (72.3%) of business owners in the last 12 months.

So it should come as no surprise that this is a turnoff for many SMEs. While non-banks have restrictions, they don’t typically have to deal with the same type of stiff regulations that main banks do, making them a more flexible and enticing option for many business owners.

Fast Approval

Quick approval turnaround times are another major factor. 17.1% of SMEs said they like the fact that it takes much less time to obtain capital from non-banks. 

For instance, it can easily take a couple of weeks to get approval for a loan from a traditional bank, if not longer. However, loans from non-bank lenders can be approved in as little as 24 hours and tend to require less paperwork. 

Many SMEs who need money quickly simply don’t have the time to wait for funding from main banks, and as a result, turn to non-bank lenders. 

Royal Commission Disclosures

Besides that, misconduct in the banking industry has created reservations among some business owners. According to the Index, “Almost one in 10 (8.8%) said Royal Commission disclosures on misconduct in the banking sector was the reason they use non-bank lenders to fund their growth.”

SMEs have become more wary of big banks in recent years, and this trend is unlikely to change any time soon.


Non-Bank Financing Options

At this point, we’ve established that non-banks are now the more popular financing option for Australian business owners when compared to main banks. But what are some specific types of facilities SMEs can use to generate working capital?


Debt Factoring

This is often known as full service debtor financing and is ideal for businesses who are in the start-up stages or who are experiencing rapid growth. It involves a simple, straightforward process where the business owner first uploads the same invoice to the lender that they send to their client. 

The lender will typically review the invoice within 24 hours, and if approved, the business owner will receive up to 80% of the value of the invoice, minus any fees. Once the client pays the invoice in full, the business owner receives the remaining 20%. 

There’s usually no real estate required, so SMEs don’t have to deal with the hassle of putting up their home or commercial property as collateral. Instead, their outstanding invoices serve as collateral. Another key benefit is that the lender assumes collections responsibilities, meaning the business owner doesn’t have to worry about tracking down payments. In turn, they’re free to focus on core operations and growing their company.


Equipment Finance

Investing in new equipment and being able to promptly replace old equipment is vital to running a successful company. Another type of non-bank lending that’s catching on with SMEs is equipment finance. This allows them to borrow up to 100% of the value of significant equipment such as forklifts, lathes and company vehicles with a fixed term and rate. 

In turn, this gives business owners access to crucial equipment that can help boost productivity and provide a competitive advantage without having to go through a traditional bank.  


Asset Finance

And for those SMEs who already own major assets like a plant, equipment or property, they can use asset finance maximise the amount of working capital that’s available. For those who are already using an invoice finance facility like debt factoring, they can leverage their assets to gain access to even more financing.

This can serve as a catalyst for sustained business growth and also works well for a buyout, sale of a business or merger/acquisition.


A New Era of Business Financing

Although there were many interesting findings in Scottish Pacific’s September 2019 SME Growth Index Report, the one about non-banks leapfrogging main banks for growth funding is one of the most notable. It’s firsthand proof that we’re living in a new era where turning to traditional banks as the primary source for working capital is no longer a given.

Instead, more and more SMEs are recognizing that non-banks can not only be viable lenders but are often the preferred option. It’s just a matter of knowing where to turn. 

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