The year is in full swing, and many Australian SMEs are readying to kick things into high gear. In fact, 58% of SMEs are forecasting positive growth for the year ahead, despite low-interest rates and the depreciating Australian dollar.
But while a significant number of SMEs are predicting growth, many have not planned how they will achieve this growth financially.
The reality is that around two-thirds of business owners dip into their own pockets to keep their businesses going. An alarming 17% use their personal credit card to cover business shortfalls, and close to half use personal finance facilities to fund their business in times of need.
That’s why it’s important that small business owners understand that there are better options available. Fintech may be a buzzword, but it has also resulted in a number of different types of alternative lenders making capital more accessible, affordable and more personalised.
What types of alternative lenders are available to you?
And which is the best suited to your business?
Online Business Loans
Online business loans typically range from $3,000 – $250,000, with the interest rate calculated according to the risk profile and growth potential of your business. They are usually short-term loans, repaid over 3 to 12 months. Importantly, online business loans are mostly ‘unsecured’ up to $250,000 depending on the lender, so there is no need to secure your loan with your family home or assets. Most alternative lenders offer a paperless, online application and provide a lending decision within 24 hours, with funds deposited into your bank account within 72 hours.
Online business loans are a great option for SME owners, particularly those in service-based, e-commerce industries or those without the traditional physical assets (such as heavy equipment or inventory) to offer the bank as security. Small business owners, however, should do their homework and make sure they know exactly what fees are involved, along with comparing interest rates between each lender to make sure they are getting the best deal. Business owners might be liable for late fees or direct debit fees, so it’s imperative to do your due diligence.
P2P or ‘Marketplace Lending’
Peer-to-Peer (P2P) lending matches investors directly to creditworthy borrowers who need a loan. Instead of requesting a loan from a financial institution, such as a bank, borrowers request that a loan is backed by regular people, or investors. This usually results in lower operating costs, enabling investors to get a better return and borrowers to secure a lower rate.
Again, small business owners need to do due diligence when it comes to P2P loans. If you’re creditworthiness falls, your interest rates can skyrocket. If you’re late on payments, fees can be significant.
Crowdfunding has peaked in recent years with one key benefit being the efficiency and effectiveness of securing cash quicker than traditional methods, along with getting your business and brand message to potential customers. Lending and borrowing is generally low risk, but it involves good planning and lots of promotion. It is also effective for new business projects and products trying to get off the ground.
Invoice finance or asset-based lending
Invoice financing enables business owners to borrow money based on the amounts and/or receipts owed to them by their customers. In other words, a business can access a loan based on the sum of their invoices due. Invoice financing is an innovative way for businesses to manage their cash flow better and avoid shortfalls. Lenders provide a percentage of the unpaid accounts receivable, less fees. The beauty of invoice finance is it unlocks capital due to you as soon as you raise the invoice.
Businesses no longer have to wait for 30, 60, 90 days to be paid, which means they, in turn, can pay their suppliers more efficiently and bridge any gaps in cash flow. Small business owners should compare the players in the market, paying attention to service charges or fees and interest payments, hidden restrictions or obligations.