Business lending is changing before our eyes - it’s just that most people haven’t realised yet.
Most Australian businesses go to banks when they need funding; others use corporate bonds. Both methods can be effective - but both come with problems.
Right now, as everyone knows, banks have clamped down on lending, which is affecting even good businesses that found it easy to get loans in the past. As for bonds, they’re complicated, and not a realistic option for SMEs.
That’s why an increasing number of businesses are turning to peer-to-peer lenders like Credit Connect Group. We’re definitely seeing an uptake in loan applications from businesses; other private lenders we talk to are experiencing the same trend.
In other words, the market is changing.
The latest Australian Bureau of Statistics data for commercial finance, for October, had some interesting numbers. Non-bank lenders enjoyed year-on-year growth in several commercial lending categories, including:
- 4% increase in commercial loans for the purchase of real property
- 7% increase in commercial loans for motor vehicles
- 1,527.4% increase in commercial loans for refinancing (albeit from a low base)
Businesses are drawn to fair, fast, flexible lenders
Why would businesses seek finance from peer-to-peer lenders and other non-bank institutions?
It would be simplistic to say businesses just want money wherever they can get it, because Credit Connect and other non-banks take their responsible lending obligations seriously.
A more accurate answer would be to say that businesses are drawn to lenders that will give them fair, fast and flexible credit assessments.
Businesses know they need to prove they can repay loans. All they ask in return is that applications are judged on their merits, not according to rigid, one-size-fits-all rules.
Peer-to-peer lenders aren’t just filling a gap in the market; they’re actually offering superior value. That’s part of the reason why the commercial finance market is changing.
Investors want diversification and strong returns
Another reason is that an increasing number of shrewd investors are stepping forward to fund this growing cohort of businesses.
Some investors are attracted by the strong returns - for example, since 2006, Credit Connect has provided more than $300 million of loans and delivered a weighted average return of 11% per annum. As a matter of fact Credit Connect investor clients for the entire 2018 year earned an average net return of 10.27%.
Others want to diversify - property, shares, bonds and term deposits can be good places to park your money, but it’s always risky to put all your eggs in one basket.
Then there’s the current state of the market - the All Ordinaries lost 7.4% last year, while Australian government bonds and term deposits are delivering yields of about 2-3%.
Peer-to-peer lenders like Credit Connect Group match investors who want to grow their wealth with businesses that want to fund their operations.
Banks are steadily losing market power
The old days of business lending are over.
True, banks will still make most of the loans - but, for many businesses, banks will no longer be the only option or even the first option.
As peer-to-peer lenders steadily increase their market share, banks will be forced to lift their game, which will be great for business customers.
That, in turn, will force peer-to-peer lenders to find new ways to offer value not just to businesses, but also investors.
In this new market, power is slowly but surely moving away from the almighty banks. That’s great news for businesses and investors.