Prospa’s successful IPO has put a renewed spotlight on our rapidly growing ‘alternative lending’ industry. Interestingly, many have queried why we need new lending sources, and where this new source of finance is headed. The short answer is of course ‘because the banks suck’ but there’s a lot of interesting opportunities that arise from their failure.
With almost 44% of total employment in Australia related to small businesses, Australia has a particularly large small business base that is vitally important to the health of the overall economy. In many ways, the nascent alternative-lending sector has been custom-built to support this SMB and entrepreneurial element of our society, stepping in where the banks have been found incapable and unwilling to adapt to the sector’s needs.
There’s been a lot of businesses who needed better finance options in Australia. We completed our second capital raise not too long ago (an equity funding of $8m) just to meet the demands of our growing customer base. As more and more business owners turn away from banks thanks to the Hayne Royal Commission highlighting some serious malpractice, we’re amping up our presence, and others in the space are doing the same. Here’s my top 3 predictions of where the future of small business lending is headed:
#1 Micro-lending will become the norm
When we talk about small businesses, we tend to imagine retail and hospitality shops in the local shopping centre. The reality is often incredibly different – especially when you consider the rise of micro-businesses.
More than ever before, there are thousands of smaller-scale businesses that are making a bigger difference in the economy. Think graphic designers, photographers and even your homemade kombucha seller at the local market. Many do this work on the side to a regular gig, but then may need a cash injection to pay for equipment repairs, new software, a POS system etc. to enhance their business and make a passion or hobby grow.
Soon it will become a regular thing to lend to the myriad ultra-small businesses. Before, the up-front costs of transitioning a hobby into a business could stop a project in its tracks. Alternative lenders will fill a gap in the market, letting the side hustlers of Australia and the budding entrepreneurs scale up and become the SMBs of tomorrow.
#2 Alternative lenders will get bigger and smarter
After the Hayne Royal Commission, we see banks retreating even further back from being the prominent lenders for small businesses. The big four have no legs to stand on – held back by legacy tech platforms that mean it takes months to get approved for a loan (news flash: most SMBs don’t need a loan in 3 months, they need it tomorrow).
In stark contrast to a bank’s lending cycle, we’re a culture (almost) defined by millennials bingeing on their favourite shows that they now get on-demand via streaming services, all the while enjoying a meal they ordered at the tap of a button via their smartphone. Businesses have responded to the need for instant-gratification. In order to keep up with this new wave of comfort and ease, small business lenders will rise to the occasion by going through approval processes quickly and nimbly.
There is no need for a loan application to be treated like a journey. It’s archaic. Through our process, businesses can apply in less than an hour, and we approve or reject a loan request within an hour. This isn’t a trivial matter – it’s genuinely important in a world where business is being conducted faster than ever before. Faster loans and more competition will make for a far healthier SMB lending environment than what we endured at the hands of the big 4.
#3 Consolidation is on the horizon
There are a few players in the market now, with more coming into the space each year. As is the nature of the beast, the best will survive and grow. Then, in the not-so-far future, we will start to see consolidation. Instead of the many alternative lenders that have been around for a while, or are currently emerging, the market will consolidate to 3-4 key players of scale as opposed to a wide variety.
Through this will also come the desire for larger offerings – and the alternative lenders will quickly become capable of longer-term, larger lending. Small businesses will find what were previously short term ‘point solutions’ become ‘one stop shops’ that can help with their finance or lending needs, as their businesses grow and answer to the demands of more customers.