Brokers can play a key role in helping the small-business sector navigate the challenges and opportunities as financial assistance pares back and the economy recovers, says Nick McGrath, CEO of business growth platform Moneytech.
Small and medium-sized enterprise (SME) borrowing has been subdued during COVID-19 as the sector received substantial assistance from the government and private sectors, and put growth plans on hold. However, recently we’ve seen loan applications start to pick up, a trend we expect to accelerate in coming months after JobKeeper rolls off completely in March, commercial rent relief schemes wind up and loan deferrals expire.
The debt cliff
As assistance is phased out, many businesses will likely struggle to meet their obligations as expenses return to pre-COVID levels, but incomes remain stalled. Some so-called ‘zombie businesses’ have been so reliant on the stimulus, they are unlikely to survive on their own. Deloitte estimates up to 240,000 companies could fail due to COVID-19, a nearly 3,000 per cent increase on a normal year1.
This time will be particularly tough for bricks and mortar retailers, with UN research suggesting the global shift in shopping behaviour during the pandemic is here to stay2. Residential construction may also remain weak, weighed down by a pandemic-related drop in immigration.
Many businesses will need flexible forms of credit to help manage their cash flow and meet payments to staff, banks, landlords and suppliers until revenues recover or, in some cases, they can adapt their operations to the new normal.
Growth sectors need to borrow too
As the economy pulls itself up from its pandemic-related stumble, some sectors will experience rapid growth and demand capital to invest in and expand operations. E-commerce providers have already begun to invest following exponential growth in retail sales during the pandemic. Manufacturing businesses are also set for good growth this year with the interruption of supply chains during the pandemic forcing a lot of manufacturing back onshore and the government planning to invest $1.5 billion over four years to help local manufacturers scale up.
Infrastructure businesses and their subcontractors and suppliers are also preparing for a strong period ahead, with Australia expected to deliver a record $435 billion worth of economic and social infrastructure over the next five years3. Meanwhile, exporters are likely to get a boost from the recently formed Regional Comprehensive Economic Partnership.
The crucial role of cash flow lending
Small businesses often can’t borrow enough from the major banks to meet their needs, or access funds fast enough. Fintechs have filled this gap in recent years and offered products tailored to small-business owners, such as cash flow loans. Unlike traditional bank loans, which are usually tied to the purchase of a specific asset, these unsecured loans can be used in a flexible way to fund whatever working capital needs the business has on a day-to-day-basis – such as payroll payments, rent or inventory – and are then paid back by the business’s incoming cash flows.
At Moneytech, we recently took our cash flow lending to the next step with the launch of a new interest-only revolving line of credit designed to help the micro SME segment navigate the complex operating environment. When a business needs cash flow assistance, a typical cash flow loan, with interest and principal repayments and a fixed tenure, isn’t always the right option and may even compound cash flow problems. An interest-only revolving facility, which allows businesses to redraw capital as needed, can provide invaluable breathing space at this time of flux.
The opportunity for brokers
While borrowing options for SMEs have improved in recent years, it isn’t always easy for business owners to find the most suitable solution for their business. Often, business owners who have been unable to get their needs met by their bank have turned to Google and risk destroying their credit rating by applying for multiple loans.
Brokers are an invaluable guide for business owners who aren’t able to navigate the lending market. By providing clients with options based on their understanding of the market and how the business’s credit profile might fit each lender, brokers are critical to ensuring businesses obtain the right loan for their needs, from a credible, supportive lender.
At Moneytech, we generate around 70 per cent of our referrals from brokers. Recognising the importance of brokers to our business and as a source of support to SMEs, we continued broker commissions for clients under hardship request during the pandemic. We also recently partnered with Lend to implement a referral partner portal for brokers to efficiently input customers’ loan applications.
While brokers in recent years have diversified beyond residential mortgages into commercial lending, many still focus on asset and equipment finance and commercial property loans. Expanding into cash flow lending is another way to create new revenue streams, add value for customers and make your business more sustainable.
1. Deloitte, Hundreds of thousands of businesses face closure as the ‘fiscal cliff’ looms, June 2020: https://www2.deloitte.com/au/en/pages/media-releases/articles/businesses-face-closure-fiscal-cliff-looms.html
2. United Nations Conference on Trade and Development, COVID-19 has changed online shopping forever, survey shows: https://unctad.org/news/covid-19-has-changed-online-shopping-forever-survey-shows
3. Australian Constructors Association (ACA), Sustaining the infrastructure industry, September 2020: https://www.constructors.com.au/wp-content/uploads/2020/09/ACA-IA-Response-Final-Version.pdf
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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