Research commissioned by online SME lender OnDeck has found that while 40 per cent of SMEs surveyed had applied for finance in the past, nearly a quarter (23 per cent) had been rejected for a loan by their bank – with this figure rising to 37 per cent for businesses that had been in operation for less than five years.
Around a third of borrowers rejected by the banks for finance said they relied on family or friends for funding, or used their credit card instead.
However, even those that did apply for bank finance said they believed that their business was negatively impacted by the experience.
Nearly a third (29 per cent) of SMEs that have applied for bank finance said their business was affected by the experience.
The main impact was a slowing or halting of normal business activities (57 per cent), according to the SME lender’s data.
Lengthy approval processes also led business to delay delivery of products or services (42 per cent), delay debt payments (40 per cent), put off buying new equipment (39 per cent) and hire new staff (12 per cent).
OnDeck’s global CEO, Noah Breslow, commented: “For SMEs, time is money, and the number of hoops that SMEs need to jump through to secure bank finance is clearly adding to the cost and stress of gaining much-needed funds.”
However, he noted that 65 per cent of small businesses would still try to access finance from their bank, with 27 per cent stating they would turn to their personal funds.
A growing proportion of SME borrowers are turning to online lenders for finance, he added.
Mr Breslow told Mortgage Business: “We’ve been in Australia since 2015, and it used to be that 11 per cent of small business owners would consider getting an online small business loan; now that number is 22 per cent, and if you have been rejected by a bank, that number doubles again.
“It took us six or seven years to build awareness of this segment in the US, but I think it is happening faster here. Once it gets to a critical mass, it will go up very quickly.
“And when you couple that with banks tightening their credit aperture, even in mortgages, that will see a ripple effect as well and borrowers will seek alternatives,” he continued.
According to Mr Breslow, with nearly a quarter of SMEs saying they would be seeking additional business finance in the future (rising to 39 per cent for SMEs with six to 10 employees, and 56 per cent for those with 11-49 employees) there is “clearly strong demand for finance among the SME community”.
“Large numbers of Australian SMEs may not be reaching their full potential either because they cannot secure bank finance, or because an inefficient and lengthy lending process is adding to the cost burden.
“It is important for SME owners to realise that more efficient funding options are available through online lenders. Even SMEs that meet bank lending criteria can benefit from the speed and convenience of an online lender,” he said.
OnDeck’s global CEO said that this offers a strong business opportunity for brokers to diversify their revenue base by expanding into SME lending, adding: “I encourage the broking profession to engage with online lenders and diversify their revenue base to include SME lending.
“By helping SMEs access the finance they need, this would be a win-win for brokers and the small business community,” he said.
The research echoes that undertaken by Judo Capital recently, which suggested that the gap in SME funding is around $83 billion and follows on from the announcement that the government has approved a new $2 billion securitisation fund to help “unlock a competitive funding source for smaller lenders, allowing them to compete with the major banks and on-lend to small and medium-sized businesses on more competitive terms”.
The banks have also been looking to improve lending to small businesses, with CBA announcing earlier this year a series of changes to benefit small businesses, including the removal of some business loan fees, while Suncorp Bank recently pledged to provide $3 billion of new credit to small businesses and “increase its appetite for lending with less security”.
[Related: Non-major pledges $3bn to SMEs]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.