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Weighing Up Financing Options for SMEs

Bank bashing is something of a favourite Australian pastime. We have a love/hate relationship with our major financial institutions: we love to complain about high bank fees, but we are slow to switch brands or accounts; we hate it when the banks generate huge profits from those fees, but most of us benefit from the dividends because we have bank shares in our superannuation accounts (either as direct equities, or via managed funds).

Data from Roy Morgan Research  shows that overall customer satisfaction among retail banks is currently at an historic high, at over 80%. Among smaller banks (e.g. regionals) and mutuals (credit unions and building societies) it is even higher.  

However, small business owners are far less satisfied with their bank, at less than 75% . Again, regional banks score much higher, and credit unions and building societies score higher still.

Which is interesting, because many business owners tend to bank with the same brand as they do for their personal banking.

Two reasons for this discrepancy may be the limited financing options banks make available to business owners, and the higher costs of business transaction accounts. Traditionally, a business owner would either take out a loan, typically secured against the principal home, or arrange an overdraft facility (either secured against assets, or backed by a personal guarantee).

This emphasis on secured lending has overshadowed other forms of financing, such as cashflow lending. The latter comes in a variety of flavours – debtor financing, factoring, invoice discounting, and export credit guarantees, for example. Some formats are designed for specific types of transactions (such as sale of goods), but the goals are similar: free up working capital in the business, by providing immediate access to finance once customer invoices have been raised.

Although cashflow lending has been around for decades, it’s neither particularly widespread (outside certain key industries such as the OEM sector) nor well understood, and not every bank will offer such facilities. But it is beginning to re-emerge as something of a disruptive element in business banking, in response to new business models, new markets and new technology.

For example, some on-line trading, payment and sourcing platforms offer variants of cashflow lending to their sellers, based on the volume and value of the transactions going through their systems.

For many small business owners, there may be several reasons why secured lending is not an option:

  • First, if it’s a new business, especially one established by a younger owner, there may not yet be any property or equivalent assets to borrow against.
  • Second, if the business is focused on delivering services or digital products, the business is less likely to own premises, plant or equipment, which can be used as loan collateral
  • Thirdly, a business owner may have very good personal and emotional reasons for not wanting to put up the family home as security. The stress of running a business does not need to be exacerbated by the thought of risking or jeopardising the matrimonial property

The likelihood is that most business owners will tend to stick with their main financial institution for basic deposit, transaction, loan and credit card accounts – perhaps even for some merchant and payment services. After all, continuity is important when building trusted relationships, and a customer’s banking history can help to reduce product pricing based on loyalty and transactional history, as well as credit risk profile.

But when it comes to “non-core” products or bespoke financing solutions, even the most loyal bank customers will look to competitors and non-traditional providers based on:

  • Service and Customer Experience
  • Product Choice
  • Customisation and Personalisation
  • Flexibility
  • Price

A final thought: as banks will need to hold more regulatory capital against their exposures to asset-based lending, there will be more opportunities for other financing options, including cash-flow lending.

If you need another finance option, call Timelio on 1300 38 63 63 or contact us through the website today. 


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