Despite the banks (or perhaps, because of them) FinTech (financial technology) is on the rise in Australia. After all, more than half of Australian SMEs have a loan facility of some description, and only 30% are completely debt-free. It’s easy to see why more businesses are embracing FinTech, tapping into the alternative finance market, which Morgan Stanley predicts peer-to-peer lending will be $22 billion to Australian SME’s by 2020.
There are any number of reasons why SME’s fail:
- They start their business for the wrong reasons, including; perceived benefit of work life balance (it’s a lot of hard work), to be your own boss (ditto) and to get rich (many small businesses turnover less than $200,000 per year).
- They haven’t been in business long enough. Only 67% of non-employing small businesses, 75% of businesses with 1 – 4 employees and 78% of those with 5 – 19 employees are still in business after five years.
- Insufficient capital – or no capital at all. Unbelievably? Bootstrapping your business with a do or die game plan is not a good idea!
- Most of their revenue comes from a small number of suppliers, meaning that the loss of a single client could have a significant impact on liquidity.
Australia’s banking monopoly has been choking local innovation
The ongoing saga with Australia’s banking monopoly has been choking local innovation. To put it simply, there has not been enough competition within the Australian banking sector. The barriers to entry are largely based on perceived risk for the Big Four, who are notoriously risk-averse and enjoy a healthy command of the supply and demand in domestic corporate finance. A staggering percentage of small business owners believe that business finance isn’t easily accessible.
Industry sets the standard for competition and profitability, these days many businesses are turning to peer-to-peer lenders and not even bothering with traditional banks. At the best of times, getting bank finance is a slow, cumbersome process that requires a huge amount of time-consuming preparation.
Of course, it is important to do your groundwork and build a strong business case for taking out a loan no matter where you turn for funding – but the level of preparation required for a loan application can be a major barrier, especially if your need is urgent.
Promising business opportunities can be lost while you’re caught up in preparing financials or waiting for banks to give you an answer. Speed to market and the ability to pivot is as important for a small business looking to get off the ground as it is for a financial provider looking for a customer.
The Big Four Banks are on Notice: Innovate or die!
The truth is, very few small businesses can meet the Big 4 checklists, and the Big 4 have had the market cornered for so long that they are not especially interested in coming to the party.
Before you can even make a bank loan application, you will need to compile comprehensive financial data to prove that you are a good credit risk and will be able to meet your repayment obligations.
Among other things, you can expect the bank to ask for:
- A detailed business plan, including strategic plan, SWOT analysis, and key performance ratios.
- Trading forecasts and cash flow projections based on clear, justifiable assumptions.
- Full financials for your business for up to three years, including profit and loss statements, balance sheets and cash flow statements.
- Credit history for you and your business.
- Personal financial data (for personal loans or financing where you will be acting as guarantor).
- Details of the property or assets you can offer as collateral.
- A loan proposal showing how you will use the financing to grow or improve the financial performance of your business.
The alternative finance market
There is an ever-growing number of these ‘FinTech’ finance providers, offering unsecured financing to small businesses that meet far more achievable requirements. Even online lenders aren’t keen to finance start-ups, which pose too much of a risk – but with around six months of successful trading history and a personal guarantee of the loan, you may be able to get the funding you need to push your business to the next level.
Apart from accessibility, FinTech financing has several advantages:
- Simplicity – applications can be made online with minimal supporting documents.
- Speed – applications are often assessed within a matter of hours, and funds can be in your account within days.
- Flexibility – minimum borrowing amounts can be as little as $1,000, and repayments can usually be scheduled to suit your cash flow. Some lenders also offer alternative types of funding with repayments based on sales, such as factoring and merchant cash advances.
What is the Government Doing?
With the innovation of FinTech and traditional banking going to the back burner, the government has started to make changes. For the year 2016-2017, the treasury is going to research and explore uses for blockchain. Blockchain is a technology that will help businesses speed up interactions, reduce costs, and expand their overall capabilities by allowing for hundreds or even thousands of investors on one loan.
It brings the borrowers and lenders together in a way big banks cannot.
Treasurer Scott Morrison wrote that the commitment to FinTech by the government will “play a central role in aiding the positive transformation of our economy.” Only time will tell if this is true and the investment will pay out.
Only by fostering an Innovation Culture can the Australian entrepreneurial scene remain competitive in the international market.
Contributed to ImagineNation by Mary Paterson
Mary is a freelance writer and small business journalist who has been collaborating with other freelancers and start-ups. Connect with her at Authorflair.com for more insights into Small Business finance.