Go back in time to 2010 and you’d struggle to count just a handful of online business lenders in Australia. It is the US-headquartered Capify (formerly known as Ausvance) who stake claim to being the first to disrupt the Aussie lending market for business in 2008. Australia’s most successful fintech lender, Prospa, was still a mere concept ready to take the market by storm from 2011. Fast forward to 2021 and the last decade has seen a flood of Australian online business lenders hit the scene. Nowadays, it’s not so uncommon to find business loan brokers boasting a network of over 80 bank and non-bank Australian lenders.
What Are Online Business Lenders?
Online business lenders are generally considered as alternative business lenders, i.e. non-authorised deposit taking financial institutions. The first online loans were peer-to-peer originated and were issued in the U.K. in 2005 and in the U.S. in 2006. The pace of online business loans ramped up after the financial crisis when traditional lenders were reluctant to resume lending activity. Online loans soon outgrew the retail focused peer-to-peer lending model and most online lenders operating today are funded by institutional investors, including banks. Some strictly peer-to-peer lenders do still remain.
How Big Is The Alternative Lending Market In Australia?
When one of the largest alternative lenders in the world, OnDeck, entered the Aussie market in 2015 they were convinced of its potential. In the same year, Morgan Stanley published a report titled ‘Global Marketplace Lending: Disruptive Innovation in Financials’ which estimated the total addressable market for small business lenders in Australia could grow to $95 billion by 2020. OnDeck CEO Noah Bradley believed that whilst the Australian market would be smaller, it had the potential to outpace the US in its transition to alternative lending.
With the benefit of hindsight, have Morgan Stanley’s forecasts been correct? It’s difficult to pinpoint an exact answer as to the current size of the alternative market for small business lenders in Australia, but, looking at business indicators, we have to say not quite. On a global basis, OnDeck has now originated over $13 billion (USD) in small business loans. However, a $75 million financing facility, provided by Credit Suisse to OnDeck Australia, would suggest loan originations in Australia comprise only a fraction of their total figures.
Australia’s most successful online business lender, Prospa, originated just over $450 million (AUD) in loans throughout its 2020 financial year, meaning the firm has now issued over $1.5 billion in small business loans since inception. Indicating a growing Australian market for non-bank lenders but not quite the size anticipated by Morgan Stanley in 2015 - certainly not for business lending in Australia anyway. Indeed, non-bank lenders have certainly gained traction in the mortgage market with Firstmac now having a balance of over $12 billion in outstanding home loans.
Given the untapped potential that remains for alternative lenders and business lending in Australia, it goes a long way to explaining why there are so many non-bank lenders looking to capitalise. Small businesses remain one of the most dissatisfied customer segments with traditional bank offerings, yet awareness and adoption of non-bank lenders still remains relatively low.
Are Online Business Lenders All That Different?
Given the sheer number of online lenders operating in Australia, it can be difficult to differentiate one from the next. That’s not to say differences don’t exist however, as there are a few ways in which online business lenders can prove unique, including:
• Product. Whilst the most common form of finance offered by online lenders are unsecured and secured business loans, some small business lenders offer more. Businesses can access a line of credit with Prospa, a Merchant Cash Advance through Capify, Equipment Finance through Business Fuel and a Business Overdraft through GetCapital.
• Borrower Requirements. Different lenders ask for different minimum requirements to be met by borrowers. This can be based on the time that a business has been trading, their credit score and annual turnover.
• Loan Amount. Most online lenders target SMEs seeking somewhere between $5,000 and $300,000 but lenders such as Max Funding and GetCapital have facilities ranging up to $1m.
• Approval Process. One of the benefits of online lenders is the ability to make a lending decision fast. Some lenders still prefer to utilise a team of credit analysts, whilst others will be more algorithm focused.
Even though online lenders can sometimes struggle to differentiate from one another, they almost always enjoy the same benefits over banks. The application process is quick (often under 10 minutes) and a lending decision, whether approved or not, should be made within 24 hours. If a loan is approved, funds are often issued the same day. The whole application process can be completed online and whilst the big banks have only recently been able to accept e-signatures for commercial loans as a temporary measure throughout Covid-19, the likes of Prospa have been accepting e-signatures on SME loans since 2015.
In addition to direct lenders, Australia has seen a growing number of business loan marketplaces. These completely online tools conduct a business loan comparison based on a borrower's inputs and recommend the most appropriate lenders. Whilst there is little to differentiate one business loan marketplace to another - whether this is Lend.com, Become.co or ebroker.com - they all act as a free alternative to business loan brokers.
Business Lending in Australia in 2021
Business confidence in the economy is beginning to return and as SME investment increases, so too should demand for SME financing. For the quarter ending March 31, Prospa’s total loan originations were largely in line with origination volumes achieved prior to the impact of COVID-19 ($121m vs $122.2m in the last pre-covid quarter). During the quarterly announcement, Prospa CEO Greg Moshall announced “Given the current economic outlook, we are optimistic this growth will gather pace as the year progresses due to the pent-up demand for business investment and the seasonal uplift we usually see in originations towards the end of the financial year.”
Mindful of small businesses still concerned by unpredictable revenues, Capify has introduced the COVID Flexible Loan. A new, innovative product that serves as a hybrid between a merchant cash advance and a standard business loan. With no fixed repayment schedule it allows borrowers to repay the loan based on their revenues.
OnDeck has recently announced the launch of a new credit scoring model that should benefit newer enterprises and sole traders that may lack volume in commercial data. In pilot trials of the new risk model conducted during the first quarter of 2021, it recorded an 11 per cent increase in approvals for business loans up to $250,000 without OnDeck taking on any additional risk.
Much like the recovery from the financial crisis, alternative lenders with a better understanding of small businesses appear likely to play a crucial role in the SME recovery from COVID.
Comments powered by CComment