Bank Said No – Australian Funding Alternatives for Start Ups
If you’ve just been turned down by your bank for a small business loan, you are not alone. Just under 47% of Australian businesses fail due to under capitalisation and many small business owners believe that business finance is difficult to access.
Written by: Kylie Glover
Updated May 2023
If you’ve just been turned down by your bank for a small business loan, don’t despair.
Actually, you’re in very good company – big banks are notoriously risk-averse, just under 47% of Australian businesses fail due to under capitalisation and many small business owners believe that business finance is difficult to access.
There are many reasons why your application might have been rejected, including:
- You cannot offer the level of collateral/security the bank requires as security
- The majority of your revenue comes from a handful of suppliers
- Your revenue / cash flow is inconsistent
- You haven’t been in business long enough, you’re a start up
- You have existing debt or loan facilities
- Your business is seasonal
- Your industry is weakening
- You have a poor credit history.
On top of all that, the bank may simply not have taken the time to understand your application.
The fact is that very few small businesses are able to meet the banks’ rigorous lending criteria. And yet more than half of all Australian small businesses have a loan facility of some description. So where are they getting the money?
The alternative market for business finance
A quick Google search for ‘small business loan’ will turn up scores of websites offering a range of financing options. With more and more businesses turning to these online, ‘fintech’ lenders for funding, the market is absolutely booming.
In fact, Morgan Stanley recently predicted that by 2020 alternative financers would be lending $11.4 billion a year to Australian SME’s.
Many of these online lenders provide unsecured business loans, with low minimum borrowing amounts and flexible repayment terms.
Others offer specialised financing including:
- Factoring – the sale of unpaid invoices to a third party at a discount rate
- Merchant cash advances – short term loans repaid over time as a percentage of sales
- Trade finance – various forms of short term loans or guarantees that bridge the gap between receiving a customer order and receiving payment.
There are more than 17 types of small business loans available to Australian start-ups.
The advantages of non-bank financing
The most obvious advantage of choosing an alternative lender for your small business loan is accessibility: you are simply more likely to be able to meet their criteria and secure finance. Online lenders use different metrics than the big banks when it comes to evaluating your business, and may be willing to offer you a loan without security, an established credit history or a long trading history.
Speed and simplicity are also major advantages: a bank loan application is usually onerous and time-consuming, with seemingly endless requirements for supporting documents. It can take weeks or even months to get approval and receive funding – and while you’re waiting, that exciting business opportunity could slip right out of your grasp.
Alternative lenders are far more agile and responsive. The application form is usually online and fintech lenders rely on technology to streamline the approval process – so once you submit your application you can usually expect to hear back within a matter of hours. In some cases, you may even have the funds in your account within the day.
The downside
Inevitably, there are also disadvantages to using online lenders. The biggest one is cost. Unlike the big banks they are prepared to take a risk on you – but risk always comes at a price. Unsecured loans mean higher interest rates, while alternative financing options like merchant cash advances can also attract exorbitant fees.
Also referred to as Shadow Banking, these lenders may require you to provide a personal guarantee, which could leave your personal assets at risk if your business is unable to repay the loan.
Another reason to be wary is that some types of non-bank lender aren’t required to operate within the Government regulations that tightly control bank practices. As well as charging usurious interest rates, they may seek to impose restrictive conditions on your business, such as prohibiting you from acquiring any other finance for the duration of the loan.
This needn’t put you off from seeking finance from an alternative source – high interest rates could be considered ‘short term pain’ in exchange for the ‘long-term gain’ of growing your business.
But is crucial that you thoroughly research potential lenders before applying, and make sure you know exactly how much they are going to charge you, and what conditions they attach to their loans. Seeking professional financial advice is strongly recommended.
I’m just starting-up – what are my options?
Even alternative lenders have criteria your business will have to meet before they’ll take a risk on you. Unfortunately, you may find it impossible to secure financing until you’ve been in business for a while and can show some history of profitable trading.
Until then you could consider a ‘sweat equity deal’, where you arrange for suppliers to provide services to you at reduced or no cost, in exchange for equity in your business. Alternatively, you could try to sell equity in your business to angel investors or venture capital funds, or even raise cash through crowdfunding.
About the Author:
Kylie Glover is a freelance writer and small business journalist; originally from Melbourne she has lived and worked all over Australia. Her experiences in finance and small business have equipped her with a vast network of contacts and broad range of experiences within the Australian entrepreneurial scene.
This article was updated in May 2023.
Website: http://www.authorflair.com/ | Google+: Kylie Glover