Evolving lending market boosts access to finance for SMEs: Productivity Commission

New lending models and technology developments over the past decade have led to more financing options for small businesses — and we’re likely only seeing the beginnings of greater access to finance for SMEs.

That’s according to a research paper from the Productivity Commission, which examined the evolving small business lending market and options available for access to finance.

Productivity Commissioner Catherine de Fontenay noted in a statement that each year about one in six SMEs seeks finance to help grow their business.

Traditionally, those loans are secured by property, she said.

“But, spurred by new technology and new data, lenders now have more capacity and confidence to lend to SMEs using other forms of collateral or even lending unsecured.”

As the space continues to evolve, we’re likely to see further improvements in the market understanding of alternative lending options, the report found, leading to more uptake among SMEs.

The Productivity Commission also found SMEs are three times more likely to seek debt financing than equity.

The majority of small business financing still comes from the big banks, with more than 90% of outstanding debt owed by SMEs held by the banks.

However, there is an ever-growing range of alternative lending products available, potentially offering faster and more flexible access to finance.

The market is also becoming increasingly competitive, the report notes, again suggesting we may see further improvements in terms of access to finance for SMEs.

According to the Productivity Commission, there is also a perception among small business owners that banks perceive them to be high-risk, and that there is little appetite for lending to them.

Further, almost one in five business owners believe their business growth is being hampered by a lack of access to finance.

If they’re correct, credit constraints for SMEs “may be a significant drag on the Australian economy”, it said.

The Commission acknowledged that there remains a “gap” for unsecured finance between $250,000 and $5 million and few lenders are currently willing to offer these loans.

“It is likely that this gap stems from commercial realities,” said the Commission, as it was unable to identify regulatory barriers that would prevent lending for these amounts.

New lenders offer improved access to finance

However, throughout the COVID-19 crisis, we have seen new fintech lenders emerge, while existing operators are exploring new ways to help business owners access capital.

Buy-now, pay-later player Zip Co, for example, has launched its split payments offering for businesses, while MYOB has partnered with SME lending marketplace Valiant Finance to offer data-informed financing to small businesses.

The Commission suggested these new lenders and products, and new technologies for assessing creditworthiness, are creating more options for SMEs, while also giving lenders more confidence

At the same time, changes to regulation have shaped the sector. Where some changes have made it less appealing for banks to lend to SMEs, they have created opportunities for non-bank lenders.

“The cumulative effect of these changes is a broader range of lending options beyond traditional property-secured loans for SMEs,” the report says.

For some small business owners, new lending options simply offer more convenience, and a way to respond quickly to business opportunities. Others may find themselves able to innovate and take more entrepreneurial risk.

For some, the Commission noted, new lending options means they will be able to borrow for the first time.

In Australia, about 2.4 million SMEs employ some 7.4 million people — or about two thirds of the workforce.

“These businesses are the engine room of the Australian economy and a healthy small business sector is vital to the economy, especially as we recover from the COVID pandemic,” de Fontenay said.

Productivity Commissioner Malcolm Roberts noted that some small business owners may not feel comfortable with the new lending options yet, or confident in making use of them.

However, he urged them to learn more about what’s on offer, and potentially work with a broker to find the option that will work best for them.

“Finding the right product may be challenging, but the benefits can be significant,” Roberts said.