The Tyro Blog

5 May 2016 - 7 min read


Why savvy SMEs are running to non-bank lenders

Fed up after years of neglect, businesses like Melbourne’s hugely-successful Retail Savvy Group are abandoning the banks for alternative lenders in order to keep growing.

From his first job as a 15-year-old at McDonald’s, Stewart Koziora has revelled in business. His CV of operations he has run, owned, or founded over two decades reads like a who’s who of hospitality brands — names like Belgium Beer Cafe (owner-operator), Lone Star Steakhouse & Saloons (CEO), Wagamama, and everything in between — and throughout his mantra has remained simple.

“Take it personally, and you are only as good as your last shift,” he said. “I’ve learnt from the best, things you can’t get from a university course. In this industry, experience is everything.“

Stewart, who at his dad’s behest did get his accounting degree, works alongside wife Anna Carosa at the helm of the Retail Savvy Group (RSG). They have also just welcomed their second child to the family only weeks ago.

The group has an annual sales turnover of $23 million across four venues in the CBD [Father’s Office, Asian Beer Café, the Shaw Davey Slum, and the Bank on Collins] and acquired their fifth venue last month which will open by mid-2016.

Now in its eighth year, RSG has 35 percent year-on-year growth which he said puts them in the “gazelle” class in business speak, and was named in BRW’s Fast 100 in 2014. They employ 170 staff and plan to grow to as many as 10 venues with expansion interstate and to Asia.

Despite all this success, he said it’s still a battle getting finance from the banks. He said while he had a “good relationship” with one of the big four banks, there was a long history of difficulties which was commonplace industry wide.

Stewart explained while the banks’ “relationship people” were good, it was its “faceless credit people” making the final decision who were to blame.

“I don’t know how they sleep at night,” he said. “The relationship people have seen my venues and love them but it’s the ones behind the scenes who are causing grief.

“They lump you in with the dodgy-run venues and local fish and chip shops in the middle of nowhere. They don’t look at your track record. They just fall back on whether you have residential security.

“They have even said ‘you shouldn’t be in hospitality’ because of the perceived risk. And it’s not just us, they do it with everyone.

“The banks are stopping growth. It’s a world of pain out there when it comes to getting financing,” Stewart said.

“It is a real battle for entrepreneurs and small business so the emergence of new players such as at the fintechs is good for competition.”

Stewart said he has got finance from several fintechs, which has “worked well”, and found them to be flexible with rates. He added the incentive was that it was based on cash flow rather than collateral.

He paints a picture of banks being over-cautious, obstructionist, unchanged since inception, and providing little flexibility offering up only costly alternatives such as overdrafts.

Stewart said he has been forced to jump through a lot of hoops when dealing with the banks including paying for a valuation on one of his properties (at a cost of $15,000) only to have the bank backflip and demand residential collateral anyway.

“Whether it’s banks, fintechs, or the government, they have to back small business. No-one is doing that at the moment.”

He said publicans have always had difficulties with banks and had to rely on funding from the large breweries who would bankroll part of the set-up costs such as installing the beer taps and refrigeration.

However in return publicans were beholden to the brewery. They would have to sell the brewery’s full range of products and provide a guaranteed return or risk having supply cut off. He added he “didn’t do deals” with the breweries.

Stewart’s advice to fintech lenders is simple: “incentivise the entrepreneur” to get them to make the switch.

“If I’ve bought a palette of beer from you. And then I tell you I want 50 more palettes of beer. I’m going to want a much better price. The same goes for my financing.”

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SME’s “exasperation” with banks behind move

Stewart’s frustration is backed up by the latest East & Partners Business Banking Index (BBI) which stated lengthy approval turnaround times, poor satisfaction, and falling loyalty due to increased “exasperation” with the major banks is causing SMEs to move to alternative lenders.

According to the BBI, SMEs are ready to jump stating that 39 percent are actively considering going to non-bank lenders. The survey of senior business executives showed 25 percent of the 1000 businesses interviewed had considered applying for loans from non-banks in the last six months.

And that number rises to as high as 39 percent among SMEs which is up from 26 percent three years ago.

Head of Market Analysis at East & Partners, Martin Smith, said the increase was due to the number of new lenders on the market, and the “exasperation with major banks”.

At the moment there are about 20 established lenders in Australia including (in alphabetical order) Banjo, Bid Invoice, Big Stone, Capify, FundX, GetCapital, InvoiceX, Kikka, LendEx, LendingPost, Marketlend, Max Funding, Moula, OnDeck, Prospa, SpotCap, The Invoice Market, ThinCats, Timelio, TruePillars, and Waddle.

Martin said the SME business lending market was estimated at more than $265,000 million which represents about 40 percent of the total market of $648,265 million. He added the problem was the reliance on collateral.

“It’s exceedingly difficult (to get finance) beyond lending against the family home. Eventually they will run out of homes to lend against,” he said.

So what are SMEs looking for in a lender?

“Product offering, bank/provider size/security, pricing competitiveness and service standards don’t trigger as key drivers for choosing a lender,” Martin said.

“It’s customer advocacy. While advocacy scores are at historically low levels, this is one of the most critical elements in choosing a finance provider.”

He said Westpac (11.1) and ANZ (11.2) recorded the lowest advocacy ratings, reflecting their poor overall BBI performance. NAB remains the only big four bank to achieve an above-average customer rating of 22.6.

Despite NAB’s outperformance, the largest lender to businesses in Australia remains well behind market leaders BOQ (59.8) and HSBC (34.7).

SMEs breaking up with the banks

The study echoes the latest Scottish Pacific SME Growth Index (March 2016) where non-bank funding demand was on the rise.

According to the index, the number of SMEs looking first to borrow from their main relationship bank is falling (32% from 38% last year), and a greater number are sourcing credit from another bank or a specialist non-bank lender (risen from 13.6% of SMEs to 16.4%).

There has been an increase of just over 20 percent in the demand for non-bank lending in the past six months.

The future of fintech lenders is bright

There also seems no shortage of options for SMEs. According to a recent study by KPMG, alternative finance is one of the fastest-growing sectors of the global financial services industry, with 2015 witnessing an unprecedented level of funding.

And Australia’s alternative finance market is the third largest in Asia Pacific and grew 320 percent in 2015. It was still dwarfed by the world’s largest alternative finance market China which registered a massive US$101.7 billion in online alternative finance transactions in 2015 — over 90 times the volume of the rest of the Asia-Pacific region combined.

So it looks like there’s plenty of demand for lenders, and as Stewart said they just have to be offering loans at the right price.

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