2017 was a big year for small business finance. The marketplace lending and broader fintech space grew by leaps and bounds. Business owners are becoming savvier when it comes finance and lenders need to adapt to the rapidly changing landscape to ensure that they are meeting their client’s needs. Those who don’t, risk being left behind.
As small business finance continues to evolve at warp speed, here are seven things to watch in 2018.
1. Less is more
Advancements in data connectivity, access to third party information and the application of artificial intelligence and machine learning will be the driving force in financial innovation over the next 12 months and well into the foreseeable future.
These advancements will streamline the application process by developing need-based loan applications tailored to the purpose of the loan. Essentially, the size and purpose of the loan, and the borrowers own risk history, will determine the amount of information required for an application.
As data becomes more readily available, borrowers will be able to go from application to decision in just a few clicks.
2. Access to finance will increase
Enhanced data capabilities will make it easier for lenders to better assess loan applications and provide a customised rate that reflects the borrower’s ability to make repayments in normal and stressed conditions.
More online lenders will enter the market and begin to specialise in certain areas. This holds the most opportunity for SMEs that struggle with obtaining finance through traditional avenues.
As lenders get better at using data to predict your ability to repay your loan, we will start to see innovation truly start to take off.
"Advancements in artificial intelligence and machine learning will be the driving force in financial innovation over the next 12 months and well into the foreseeable future."
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3. It will get harder to compare
More competition usually means a better deal for consumers, but only if the products are easily comparable and you know what you are paying for. The increase in alternative finance providers and the variations of products available have led to a proliferation of terms, definitions and offer features. It will also lead to more players pursuing dubious pricing practices.
The current lack of regulation in the communication of interest rates and fees makes it almost impossible for business owners to compare options and make informed borrowing decisions. Until there are regulations in place, focus on the total cost of the loan to compare which option is offering the best value for your business.
Late in 2017, the Australian Small Business and Family Enterprise Ombudsman released a report outlining the barriers small businesses face when trying to access finance and potential ways forward to close the funding gap.
4. Data will be king
By the end of 2018, comprehensive credit reporting (CCR) is going to start making it easier for lenders to get a better idea of your personal credit history. While this has not yet been made mandatory in the business sector, it will have spillover effects.
Small value business lending decisions will become smarter, driven by algorithms that compare your data to others. Lending decisions will rely more heavily on the business owner’s personal credit score, resulting in improved access to finance or lower costs.
While you still need to be mindful of the number of credit checks you authorise, don't settle for a deal that doesn’t feel representative of who you are as a borrower.
5. Loans will be an opportunity, not just a liability
Smart business owners will see establishing good credit behaviour (taking out and repaying small loans) as an asset, not a liability. This will unlock the ability to access more lending to take advantage of opportunities.
A business loan lets you unlock the hidden cash tucked away in your assets and put it to work helping your business grow. Taking out a loan for the right purpose can open new opportunities that you otherwise may not have been able to take advantage of.
Some of the most common loan purposes we saw in 2017 were:
- Buying equipment, which we supported through our working capital loan. The good news is we are creating a dedicated asset finance product early in 2018 to help make it easier for businesses to get the equipment they need to grow!
- Refinancing loans from other lenders with sky-high rates.
- Keeping cash flow steady during seasonal slow downs, growth periods and slow payments from large customers.
- Paying outstanding obligations to either the ATO or other creditors.
- Acquiring a new business where there may be a large upfront payment and a period where the new venture isn’t generating much cash.
6. Sharing your business’ story
We hear about storytelling as a powerful marketing tool, but it can also be an advantage when applying for a loan. Some lenders are starting to recognise that there is value in your business beyond what is written in your financial statements. These lenders will be interested to know what your business is about and how you are making it succeed – this can help with getting the right loan at the right price.
"The most common business loan purposes we saw in 2017: buying equipment, refinancing, keeping cash flow steady, paying creditors & acquisitions."
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7. Investors are hungry for the marketplace opportunity
The response and interest in what we are building that we have received from investors has been phenomenal. While we knew there was an appetite among the professional investor community for higher yields, we weren’t anticipating – at least not to the extent we have received - the interest from a broad range of investors.