Welcome to Thriver’s short reads about investing in SME debt and how the SME debt market works. You’ll read them faster than you finish your cup of coffee.
SMEs (or small business and family enterprises) are a big deal in Australia, making up 99.8% of businesses. RBA data shows that, across decades, obtaining finance from banks has been a challenge for small business. Why?
Traditionally, a business owner would go to their local bank manager to discuss their needs for money to grow. The bank manager – backed by the credit department and lending criteria – would assess the plans and decide whether to lend the business owner money.
The globalisation of bank funding, the Basel banking rules, and the way banks operate have all changed. Banks are often disincentivised from lending to SMEs. Unless a business is big enough and needs enough money, banks will not prioritise an SMEs’ needs.
Banks also run processes that don’t always need to make it easy for SMEs to access funding:
“[Small businesses] often face a number of other non-price barriers to accessing financing … The approval process is often difficult and can be relatively costly for small businesses … As a result, some small businesses on the panel reported that they had given up on seeking finance from banks.” (RBA)
Here is a real-world example from a former Thriver client:
A growing, decade-old business that always had its accounts with a Big Four bank who wouldn’t fund their working capital needs. They came to Thriver. In the last few years, we funded them and, when they grew past our $1 million limit, they rolled their facility to another non-bank lender. A few months ago, their bank noticed how much they’d grown. The bank created a product to suit the business’s needs. Why? Because the business had grown enough for it to be the right fit for that bank’s offering. Same business, same people, just bigger.
The RBA also reports that, “to reduce non-price barriers to accessing finance, a number of traditional lenders are increasingly automating processes for small business lending… Some banks are implementing digital lending platforms to simplify the application process and reduce processing times for small business customers. These sorts of platforms generally utilise customer data, such as historical transactional and accounting data, to automate credit decisions up to a certain amount (typically up to around $200,000).”
In other words, banks are starting to duplicate aspects of the fintech model for $200,000-250,000 facility limits. Fintech facilities can, in certain circumstances, charge SMEs interest rates up to 40% per annum.
So, where does this leave the bulk of the 170,000 SMEs turning over more than $2 million? Or businesses that need more than $200,000 but not enough to interest the banks?
Between a rock and hard place.
Next time, we’ll look at the options available for SME debt.