Navigating SME lenders

While the traditional sources of funding your clients' businesses still remain, there are a number of options available from a relatively new wave of lenders.

As a broker representing an SME business, you have the choice of taking the path of approaching the traditional funders, including the major banks, or some of the new alternative sources.

The major banks very much operate now in a credit matrix environment that provides more consistency in the credit decisioning process but can result in a negative outcome for businesses that are either relatively new or are deemed for a number of reasons to have a non-conforming credit.

Most credit matrices have a number of filters. The first of those is, “Has your business been registered for GST for more than two years?” If the answer is no, then the likelihood of your client being funded by that financial institution is low.

If the funding needed is to assist cash flow, it may require the support of property, which is generally the owner's or another family member's home.

Today, there are alternatives that brokers should be offering their customers; a number of cash flow lenders have entered the market with an unsecured offering.

Technology is used to streamline the process, including access to the customer’s bank statements and their accounting software. While this process can result in a quick decision and immediate availability of funding, it can be a little confronting for the customer. Issues, including security of their data and bank accounts, are a common objection. As their broker, it is imperative that you walk them through this process and provide the relevant assurances on security.

When the new wave of cash flow lenders first hit the market, the interest rates were relatively high. In recent times, competition has driven rates down. If you shop around, you will find rates that are much more palatable to the customer, particularly given the unsecured nature of loan.

Helping the customer to understand the interest applicable to the loan is also the responsibility of the broker. The use of factor rates is common in this space. There are times when it is better to talk to the customer about benefits of having the funds available.

A recent example that I saw was a customer who had the opportunity to buy stock at a heavily discounted price and could sell it at high margins. The customer could not obtain the funding from his bank, so it was sourced from a cash flow lender, with the customer realising that the returns on the sale of stock far outweighed the additional interest paid on the loan.

The new cash flow lenders either fund from their own balance sheet or operate under a peer-to-peer model (P2P). My advice on the P2P model is that you need to understand how long it will take the financier to raise the funds. Your client could be looking for a fast solution on his funding needs, but some of the P2P lenders can take up to 60 days to arrange the funds from their investors. The advantage of the P2P model, though, is that the risk appetite can be broader than other financiers.

Of course, there are also a number of lenders now offering debtor finance through funding of individual invoices for immediate cash flow needs.

Brokers should become knowledgeable of these products, not only to support their customers but to also diversify their own business.