Behind the 500% increase in small businesses using marketplace lending

The number of small business customers signing onto loans through marketplace lenders has increased more than 500% over the past year, but experts say scrutiny must be put on the alternative finance sector now to ensure smaller operators get the best deal.

The Australian Securities and Investments Commission (ASIC) released its 2017 survey of marketplace lending practices this week, crunching the numbers of 12 key lenders in Australia. Marketplace lending covers a range of models, including peer-to-peer systems and other structures where investors put up funds on which they get returns when consumers and businesses borrow.

In 2015-16, ASIC’s survey of the sector put the total value of loans through this kind of model at $156 million, but that figure has doubled over the past year to now sit at $300 million. Total borrowers for the year jumped from 7,448 last year to 18,746 this year.

The pool of small business borrowers through these schemes has historically been small, but over the past 12 months there was a 509% increase, from 33 SME borrowers in 2015-16 to 201 in 2016-17. Seventy-seven percent of these business loans carried interest rates of between 12% and 16%.

Business customers borrowed $47 million through marketplace lending platforms in 2017, compared with $26 million in the year prior, according to the report.

The numbers come as regulators and Australia’s Small Business Ombudsman continue to focus on the challenges SMEs are currently experiencing when applying for finance from the big banks. In an era where property is hard to secure in Australia, Kate Carnell has told SmartCompany young business owners face big challenges ahead when applying for a bank business loan.

While options like marketplace lending provide an alternative to small businesses, Carnell has raised concerns that these models don’t always make it clear what businesses are signing up for.

The small business and fintech communities have started discussions to address these concerns, with Carnell, Fintech Australia chief executive Danielle Szetho and independent banking consultant and founder of thabankdoctor.org, Neil Slonim, holding a roundtable on the issue of transparency in SME lending this week.

Slonim tells SmartCompany that while the pool of business borrowers using marketplace lending is still very small, conversations must be had about it and alternative finance models more broadly.

“The main thing businesses need to understand is that borrowing through one of these models is different from borrowing through a bank,” he says.

The larger lenders have less room to move on their loan terms and are often “more transparent” when it comes to fees than their newer fintech competitors, Slonim says, while alternative lenders can find it “difficult to convey the true cost” of a loan.

He says it’s important to find a balance when discussing these concerns with fintech companies, because areas like marketplace lending will be valuable for small businesses into the future.

“It’s a really important sector, it needs to be encouraged, but there does need to be more self regulation and the regulators. In particular, ASIC will come in if they’re not satisfied there’s progression [on regulation],” he says. 

These discussions will be a long-term process, with the Small Business Ombudsman, Fintech Australia and thebankdoctor.org planning on releasing a report in February 2018 with recommendations for establishing guidelines for interest rates and fees from alternative lenders.

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