Meanwhile, Australia’s four largest banks have a standard practice of demanding small business owners secure loans through collateral, including the business owner’s home. Those who do get a loan pay as much as 2.15% higher compared to larger companies.
This is where non-bank lenders can step in to satisfy a clear market need left void by major banks. Comparing the small business finance environment shows there are multiple lenders available for small business owners to take advantage of. Small business owners are encouraged to do their research on the multiple reputable lenders who compete with each other by offering compelling rates. Most lenders can secure a six-digit loan in a matter of days, if not quicker.
Importance of small business
Small businesses are vital to Australia’s economic growth engine. According to the Australian Government’s own data, small businesses put 5.5 million people to work and generate close to $400 billion worth of economic activity. Some of the more successful initiatives launched by the Australian government include tax cuts, improved GST reporting, faster depreciation deductions for assets up to $20,000, among others.
Thanks to the advancement of ‘fintech’ (financial technology) firms, Australian small business owners have better access to loans than ever before. Many lenders make use of an algorithm to process applications which essentially erases complex and in-depth paperwork and creates a stress-free process.
Best Australian rates
One of the more reputable Australian lenders is Prospa. The company took home the number one spot in the Financial Times 1000 High Growth companies in 2018 and successfully funded more than $1.2 billion to more than 20,000 businesses. A typical offer consists of an Origination Fee of 3%, a Small Business Loan of 9.9% to 26.5%, and a Line of Credit from 14.95% to 29.95%.
Of course, each loan offer will vary based on each individual company’s unique circumstance. Small businesses that generate higher sales volumes are more likely to take advantage of larger loans or better preferential treatment.
Rates vary among different firms but remain competitive for the most part. Some lenders who charge higher rates could justify doing so by including value-added services, additional benefits, or more relaxed payment options.
How Australia’s small business environment compares to England
Australia and England share a very close relationship and economic conditions so comparing the small business environment in each English-speaking territory could be useful. Perhaps the most telling sign the lending environment in Australia lacks some of its international rivals is a comparison of government programs and bank rates.
Australia’s government committed to funding a $2 billion small business securitization and growth fund which has been criticized for its very slow rollout. By comparison, the U.K. government not only offers unsecured small business loans to startups, but it provides free support and guidance and up to one year of free mentoring.
Unlike Australia, major England-domiciled banks don’t ask their potential clients to place their home as collateral for loans typically less than £100,000. Owners in England are offered superior rates compared to their Australian counterparts.
Barclays, for example, offers a much smaller business-friendly interest rate of 9.9% APR (annual percentage rate) on loans up to £25,000. APR on high loans is provided at the time the application is approved.
Peer-to-peer and non-financial lending institutes also target England-based small business owners at rates that are higher compared to banks at around 10.5% APR.
The bottom line
Alternative finance lenders are providing a valuable service to the small business community but at an added cost to the entrepreneur. Those who can afford to give in to the bank’s demands of placing their home as collateral face an important decision to make.
On one hand, the business owner would save themselves a few percentage points on their interest payments which could add up to a lot of money on a $500,000 loan. But on the other hand, the business owner will need to accept the possibility of losing their business and home in the event of default.
As is always the case for every business decision, the owner needs to carefully review all options available before making a decision. What works for one Australian small business owner may be the worst decision another can make.