‘Faster than we can fund ourselves’: Startup lenders boom as small business ditches banks for alternative options

Small businesses both locally and abroad are increasingly turning to non-bank sources for loans, with alternative-lending startups almost growing faster than they can handle.

Two separate reports last week indicated SMEs were eschewing big banks as their typical sources of funding, instead setting their sights on new market entrants offering more competitive rates and better service.

For the first time in five years, the Scottish Pacific SME Growth Index, commissioned by local lender Scottish Pacific, found the number of SMEs who picked their bank as their main source of lending capital had dropped below 20%.

The survey found businesses were about as likely to turn to an alternative lender as they were to ask their bank for a loan, and predicted by 2020 alternative lenders were likely to overtake traditional lenders as key funders of small businesses.

These figures were backed up on an international scale, with the Organisation for Economic Co-operation and Development (OECD) finding alternative lending such as online peer-to-peer financing and equity crowdfunding increased significantly in 2017, especially for countries with smaller markets.

While this is good news for SMEs who may have otherwise been cut out of getting a much-needed loan, it’s even better news for the new and disruptive companies offering the loans.

One such startup is Lumi, a local lender who’s founder Yanir Yakutiel just months ago closed a $31.5 million funding round to fuel his company’s growth. Today, he tells StartupSmart the business is already in the midst of a second funding round, with the space growing faster than he could have imagined.

“The market’s growing at a faster rate than me or any of my competitors can fund ourselves. Over the past 24-30 months that we’ve been doing this, we’ve seen double digits growth month-on-month,” he says.

“I’d be pretty confident that most leading lenders in the sector would be experiencing the same sort of growth trajectory.”

Locally, Yakutiel attributes part of this growth to the discontent fuelled by the recently completed royal commission into the banking sector, which he says has simultaneously boosted the image of alternative lenders and shown banks “fundamentally” do not do right by their customers.

This has led to fintech lenders such as Lumi shaking off their “unjustified” bad reputation and coming into the fore, something Yakutiel has been waiting for, as he believes businesses haven’t been properly serviced by the big banks for the last seven years.

Credi founder Tim Dean. Source: Supplied.

Co-founder of lending startup Credi Tim Dean tells StartupSmart he’s seen a “consistent uptick” of businesses using his platform to facilitate loans. Unlike Lumi, Credi doesn’t provide the loans itself, instead providing founders and individuals with a framework to solidify and formalise loans from friends and families.

The startup has helped facilitate more than 4,000 loans so far, and Dean says more business owners have been drawn to non-bank solutions largely due to the much more favourable interest rates put on those loans.

“The average rate we see between individuals on our platform is about 4% per annum, and when you compare that to rates on offer from other cashflow lenders, it can be as much as 20% less,” he says.

Dean also notes lower interest rates can also give SMEs a better chance of paying back the loan and succeeding with their venture, pointing to that as a reason why business owners are more likely to seek out non-bank terms for loans.

“The existence of non-bank lender is predicated by supply and demand, and sadly we’re seeing many of the rates offered by banks being much too high,” he says.

Dean’s startup is also currently undertaking a $1.5 million equity crowdfunding round, and the founder believes the new form of funding will “absolutely” be used by more businesses as other finance options become more scarce.

“VCs are quite hard to engage with, and with the ASX, you’re looking at costs of about $300,000 just to be on the boards, so equity crowdfunding is quite accessible and cost-effective,” he says.

“I think more and more tech companies will choose equity crowdfunding as we move forward. In the UK, they’re seeing it rival the dollars put in by VC operators, so I think it will gather massive pace in Australia.”

Credi isn’t the only company turning to equity crowdfunding in lieu of being unable to secure other small-business loans, with founders of designer drink bottle brand memobottle Jonathan Byrt and Jesse Leesworthy telling SmartCompany in November last year the nascent form of capital raising was their only option after being eschewed by banks of all sizes.

memobottle founders Jonathan Byrt and Jesse Leesworthy. Source: Supplied.

“All we have on our balance sheet is inventory and receivables, and despite our trading record and revenues, the banks won’t touch us,” Byrt said.

“Even the smaller ones weren’t interested. It was super frustrating.”

Startups struggle to start in lending space

But while the burgeoning lending space might seem like a bonza opportunity for new businesses, Yakutiel doesn’t believe the time is right for new market entrants.

This isn’t due to any lack of growth in the lending sector, but rather due to the immense amount of capital a lending startup requires to get started, with the founder saying equity and debt financing for lenders are drying up.

“I think the market for lending startups is carved out, as Australia doesn’t really have a deep debt-capital market, and to start a new lender you need debt financing to fund it,” he says.

“Both the debt and equity market is effectively closed, so while existing lenders have the ability to fund themselves, for a new entrant now to raise substantial debt and equity, it would be a challenge.”

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