Access to Finance
Access to finance to fuel the growth of small and medium-sized enterprises (SMEs) has traditionally been a challenging and lengthy process and is still, in many cases, dependent on manual underwriting. Often, the manual processes inherent in SME lending have resulted in sacrificing either speed or relevance, and sometimes both. With Australia’s two million SMEs employing almost 70 per cent of the workforce and accounting for more than half of the private sector output, providing access to relevant and responsible finance becomes much more than an SME issue, but rather an economic imperative.
The Financial System Inquiry highlighted a number of key areas prohibiting access to short-term funding for SMEs in Australia. The first being process; the second being data (or the lack thereof) and the third being the requirement for collateral, resulting in what the RBA calls ‘allocative inefficiencies’ (1). That is, where loans are made to businesses with the best collateral, rather than those that are the best business prospects (2).
Technology
There is no doubt that a paperless loan application process will become standard across both consumer and business lending. Technology will see many of the steps associated with a loan application process digitised.
Data is core to this shift. The notion that the latest and best technology is first made available at the enterprise level is no longer true. Platforms such as cloud accounting giant, Xero, with its open API, have created a pathway for small businesses to opt in to new technology at little cost. As the move to the cloud continues (and accelerates), businesses are being enabled to share their data for a number of purposes: budgeting, payroll, invoicing and, in the case of Moula, accessing capital.
First Generation
Banks and non-banks – and in some cases, with the two working together – are capitalising on business information being increasingly available in the cloud. Like any new technology, online lending solutions have evolved as industry acceptance and adoption become more common. Consequently, there are two distinct approaches to assessing creditworthiness that can be identified. For simplicity, we will call them ‘first’ and ‘second generation’ approaches.
First generation lending platforms are characterised by limited analysis of the actual financial health of a business, taking an aerial view of their ability to service a loan. These solutions are typically sought by those seeking finance as a one-off, and more often as a last resort. These businesses accept higher loan default rates in exchange for unsustainable high interest rates that typically see businesses realising the true cost of loans after they have been ‘locked in’ to break fees and exit costs.
The accounting profession should be wary. Be diligent in your research and avoid partnering with, or referring business to, lenders who lend to everyone without careful consideration of loan appropriateness and purpose (strictly enforced regulatory requirements for consumer lending). Pricing nondisclosure is often an attribute of these lenders. Unfortunately, the obvious inclusion of a loan repayment schedule (that separates each repayment across principal and interest), is overlooked by customers in times of financial need.
Second Generation
Second generation lending platforms have been made possible by the improved availability of meaningful data and the rapidly increasing preparedness of borrowers to provide electronic access to their business data. These lending solutions assess creditworthiness through real-time credit decision making, consuming, upon opt-in by the borrower, relevant data shared via sources such as cloud-based accounting solutions.
This technology allows lenders to assess accurate business data over a relevant time period and extend funding responsibly. These lenders extend credit to good businesses who are striving for growth – they provide short-term loans to smooth cash flow or they make investments in equipment, inventory or staff. Digital fulfilment among these platforms has also ensured that once approved, loan documentation can be executed instantly and funds disbursed in the same day.
Second generation lenders focus on partnering with small businesses, and their advisers, to provide a long-term solution to short-term capital requirements. These lenders don’t exploit customers for early repayment and, instead, reward good businesses with the ability to move in and out of loans with ease. They are focused on providing a premium experience and believe in fair pricing.
The most efficient allocation of funding will exist where these data-driven, short-term, unsecured solutions are complementary to traditional secured funding where businesses can move in and out of these solutions, without penalty and paperwork, and are provided with timely and relevant finance to grow.
Footnotes:
1. Reserve Bank of Australia, “Bank Lending to Business – New Credit Approvals by Size and by Purpose – D7.4”, Mar 2016
2. Financial System Inquiry Interim Report, July 2014
This article was first published in Publicaccountant – the official journal of the Institute of Public Accountants.
* Aris Allegos is the CEO and co-founder of Moula.