Non-banks vs banks: two different approaches to business lending
Traditional banks have been around for a long time. The first bank in Australia, the Bank of New South Wales, was established in 1817. The Big Four banks date back from the 1800s to early 1900s. With a long history, the major banks in Australia offer a wide range of consumer and business products and services. As Authorised Deposit-Taking Institutions (ADI), banks and credit unions are subject to regulation by the Australian Prudential Regulation Authority (APRA). This regulation limits their flexibility in lending to businesses, including the amount and type of risk they can take on.
The bank underwriting process is generally cumbersome. For example, business term loan applications involve a large amount of documentation, which includes accountant-certified financial statements. In some situations, banks will ask for a business plan. In any case, the amount of paperwork required is often prohibitive for small businesses. After all the information has been submitted for a bank business loan, applications are reviewed manually and can take up to eight weeks to process.
The main differences with non-bank business lenders are that they use technology to simplify the lending process and they aren’t limited by the banking regulatory framework. Many non-bank lenders are fintechs. This means that technology is at the core of their lending processes. So instead of having branches where a business owner submits their application and paperwork, this is simplified and done online.
Niche approach of non-bank lenders
Another big difference between non-bank lenders and major banks is that many non-bank lenders focus on a niche. For example, Moula specialises in providing unsecured business loans to small and medium enterprises. Other non-bank lenders specialise in personal loans, digital payments, financial planning, peer-to-peer lending, foreign exchange, home loans, and other niches.
By focusing on one area, non-bank lenders can create highly efficient online platforms to deliver financial products and services.
Leveraging technology to expedite decision making
Fintech non-bank lenders leverage technology to speed up business lending decisions. Moula, for example, views recent banking transactions and online accounting data to get a clear understanding of the potential borrower’s ability to make repayments. Although not subject to the ADI regulations, Moula’s underwriting process promotes responsible lending. Applications are assessed using smarts (technology) and hearts (people) to make the appropriate lending decision for each business.
SMART Box™ boosts transparency in online business lending
In early 2019, a group of Australian non-bank business lenders introduced SMART Box™, a loan comparison tool that clearly displays the basic loan elements, including the Loan Amount, Disbursement Amount, Total Repayment Amount, the expected Loan Term, and Repayment Frequency. includes six common loan pricing metrics: Total Cost of Credit, Average Monthly Payment, Total Interest Payment (TIP), Annual Percentage Rate (APR), Cents on the Dollar, and Factor Rate. In addition, the final section answers whether there are any new fees or a reduction in the Total Payment Amount if the loan is paid off early. With a high level of transparency, there’s more clarity for business owners seeking finance.
Choosing between traditional and online business lenders
Non-bank small business loans are not the solution for all situations. For example, a commercial loan from a bank or specialist lender is usually the best option for a client wanting to purchase a business or a commercial property. In situations, where a business needs a fast and simple lending solution – to cover a cash-flow shortage, for example – a non-bank business loan could be the best solution.
Non-bank business lenders fill a gap in the market
Small-to-medium businesses make up over 97 per cent of Australian businesses. However, the finance needs of small business owners are not being met by banks. As a result of the Banking Royal Commission, traditional financial institutions have reduced their SME lending. Some major banks have stopped accepting residential property as collateral for business loans, while others have lowered their LVRs (loan-to-value ratios) for secured business loans. In this environment, a new breed of non-bank business lenders has stepped in to fill the gap.
Offering unsecured business loans through a fast and simple application process has led to the exponential growth for fixed-term, balance sheet lenders in Australia. Starting in 2013 with $10,000 in business loans, non-bank online business lending is estimated to hit $2.2 billion in 2020.