Why time is money in small business lending

Offering speed and agility, innovative online business lenders are gaining ground, delivering funding to SMEs while saving them time, Maya Breen reports

Why time is money in small business lending
Offering speed and agility, innovative online business lenders are gaining ground, delivering funding to SMEs while saving them time, Maya Breen reports

Fintech in Australia has gained momentum in 2017, especially through online business lenders focused on small and medium-sized enterprises. Business owners are finding that they have more choice and faster access to funding because innovative lenders like Spotcap, Prospa and OnDeck are focused on delivering at speed, and with flexibility and ease. And as more SMEs discover what these fintechs can offer them, the faster this type of lending is growing.

Speaking with these three lenders, MPA explores the growth in this type of lending and the part brokers play, the challenges for SME owners, the changing patterns of work, and how fintechs are connecting with the millennial generation of entrepreneurs.

Aussies choosing alternatives

Australia has become the second-largest market for alternative finance (behind China) in the Asia-Pacific region. A recent report by KMPG found that Australia’s $811m alternative finance market, including peerto- peer lending and crowdfunding, grew by 53% in the past year.

Lachlan Heussler, managing director of Spotcap Australia and New Zealand, explains that the demand for lending to small businesses is only going up. “SME lending as a part of the alternative finance sector is probably the biggest in Australia and is still growing extremely fast, and within that framework the role of third parties,
especially brokers, as conduits to that growth
is substantial.”

Heussler says Spotcap spends a great deal of time cultivating local partner networks. “Our Australian broker origination channel is by far the biggest for our business in Australia.” In fact, demand is so great he is looking to expand his partner management team, and fast. “My team that deals with brokers, I’m looking to double that immediately.”

“Our Australian broker origination channel is by far the biggest for our business in Australia” - Lachlan Heussler, Spotcap



American online small business lender OnDeck expanded to Australia in 2015 and started working with the broker channel here in mid-2017, managed by its head of sales, Michael Burke. He says the response has been very strong from traditional residential brokers looking to expand their value proposition beyond home loans. Many are discovering that their database of residential mortgage clients consists of 20–25% small business owners. “So there’s a huge opportunity to offer a broader product beyond just that residential mortgage,” Burke says.

Prospa’s joint CEO, Beau Bertoli, says online lending to small businesses is growing at a rapid rate. The company provided more than half a billion dollars in loans over 12,000 small business to date, and brokers have played a crucial part in this, Bertoli says. “Prospa is a channelbusiness that has operated a distribution model since day one, and this has been the key to our growth.”

Making lending easier

Bertoli says customer expectations have changed as a result of the fintechs that have emerged in the online business lending space. “Until a few years ago, people hadn’t experienced the same technical innovation from banks that they had benefited from everywhere else in their lives. They certainly could not access fast, easy capital from the comfort of their own workplace,” he says.

“The banks didn’t have comprehensive solutions in place for small business owners, and any options that they did offer required collateral. Prospa doesn’t require property security to access up to $100,000. The average amount our customers borrow is $25,000, and they typically need the money to manage cash flow, buy stock, hire staff, or expand operations – we simply don’t see the need to put your house on the line for a loan of this size.”

These online lenders are making funding accessible and an easy process for business owners, and Spotcap has plans to makeit even more manageable. It developed its credit risk algorithm in-house, and Heussler says the company is preparing to release a new development early next year. “We’re working on the next generation of our underwriting system – our algorithmicpowered credit decision engine – and we’re very hopeful of being able to introduce completely automated underwriting in the first quarter of next year.”

Burke says OnDeck prides itself on its fast turnaround times, with 10-minute applications and funding access within 24–48 hours. “When we actually speak to a broker or speak to a customer, our requirements are a one-page application and only three months’ worth of bank statements for loans up to $150,000, and out to a maximum term of 24 months. And from the broker or customer perspective, where that works well for them is it allows them to move very quickly and take advantage of opportunities that may present themselves so that they are very nimble and agile in the market.”

The struggles for small businesses

Bertoli says feedback from Prospa’s small business customers reveals that their three top challenges are finding and keeping customers as well as employees, and accessing working capital. “The small business market has long been starved of the ability to access unsecured funding,” he explains. “Research by ASIC also shows the biggest problem for small business owners is access to finance – either to seize an opportunity or manage cash flow. Around 80% of the two million small businesses in Australia have problems accessing capital.”

Apart from SMEs needing to access capital for their businesses, Spotcap’s Heussler points out that there is also an awareness issue, in that these business owners don’t know what other options are out there for them beyond the traditional banking channel. “So the struggle for the SME and what we face as an industry, and the headwinds for us, is just a complete lack of awareness.”

 A changing working world

Technology has changed how we work in many ways, but it has also given us the freedom to become more mobile, such as through home-based businesses or working remotely and on the move.

“Accessibility and technology are two of the key areas that have shown a lot of progress and change,” Burke says. “If you think about working patterns, whether it’s freelance or working from home, ultimately they can complete a finance application on mobile or tablet – they can be anywhere; they can be going to see a customer.”

Increased mobility brings with it flexibility in how we work, especially for entrepreneurs. “A competitive workforce with limited job prospects has triggered a wave of entrepreneurs that sidestep traditional pathways and create a completely new way of working. As such, the idea of what a small business looks like has changed dramatically,” Bertoli says.


“Accessibility and technology are two of the key areas that have shown a lot of progress and change” - Michael Burke, OnDeck


He explains that, as a result, new challenges arise when these entrepreneurs start looking for financing, but this is what fintechs such as Prospa are catering to. “While traditional institutions have rigid frameworks, we can take a more flexible approach in considering a business and its associated risk. Just because a company is run from a coffee shop or even a beach, it can be hugely successful and profitable.”

Engaging millennial entrepreneurs

When it comes to entrepreneurs, Spotcap is seeing high interest from millennial entrepreneurs, because its product offering works particularly well for this type of borrower, Heussler says. “Millennial entrepreneurs are very attuned to current business conditions and strategies in order to grow businesses,” he explains. “We see a lot of businesses coming through here spending significant amounts of money on things like Facebook advertising, and targeting not only national audiences but often international audiences with their products.”

Heussler says Spotcap’s product was designed with millennial entrepreneurs in mind as these younger borrowers often lack the hard assets, such as property, that are required for security against a loan from traditional channels. “So we work specifically with their businesses to understand what the cash flow generation capabilities of those businesses are and how we can offer growth net capital solutions to help fund the growth of these businesses.”

Not only is there demand from the millennial crowd – 22% of Prospa’s customers are millennials – but expectations too, Bertoli says.

“Millennials are the first generation to expect 24/7 access to services, including money. They have little loyalty towards the traditional banks and are quick to adopt innovative digital solutions like Prospa,” he says. “In fact, two thirds of millennials prefer to receive financial advice via a digital platform. It is this group that has tipped fintech into the mainstream because they trust you until they have a reason not to.”


“Two thirds of millennials prefer to receive financial advice via a digital platform. It is this group that has tipped fintech into the mainstream, because they trust you until they have a reason not to” - Beau Bertoli, Prospa


Looking ahead
Comprehensive credit reporting (CCR) is to be mandated by July 2018 in Australia, and Bertoli says this is positive news for fintech lenders. “Prospa already looks at says the most relevant announcement was that the federal government would commit to embracing open banking. “We’re very hopeful that this will allow businesses like Spotcap to safely and easily access client account data from organisations like the big four banks. That will enable us to really turbocharge our algorithms and scale up our lending aspirations as a result.”

On the broader picture for small businesses, Burke says: “I think the federal government’s decision to extend the accelerated depreciation rule was certainly a big win for small businesses. That certainly encourages investment and job creation and has worked well historically. “We feel very confident that that’s going to continue to drive good growth within the SME sector. It’s favourable for cash flow; it helps small businesses reinvest in their businesses and also upgrade any assets that need upgrading within their businesses. So we were very pleased and supportive to see that continue on.”