Navigating alternative finance loans
John De Bree
The Australian SME market is undergoing an exciting change with more options available to business owners looking for alternative finance solutions to the ones offered by the big banks.
However, the Australian Alternative Finance Industry has been flooded with inexperienced entrants mainly from offshore institutions offering quick fix cash loans to Australian SME owners.
At first, these lenders may appear attractive with their ability to provide fast money for a struggling business.
However, there are a number of red flags a business owner needs to be aware of to avoid borrowing from one of these rogue entrants.
So, how can you spot a rogue entrant and what are some of the things to look out for?
When you are applying for an alternative finance loan, an approved credible lender will subject the loan applicant to a full credit and background check and will not rely on the wrong channels – anyone can set up a business page on Facebook!
A credible lender will have years of historical data it can draw upon to assess a loan application. The company has experience, and with that experience comes knowledge. In addition, a lender, which has been through the full credit cycle, has come out the other end and is therefore reliable and trustworthy. Reputation and accountability are key, so you need to do your homework.
A rogue entrant can be quick to loan money and many do not have a stacking policy – meaning you can borrow a substantial amount from numerous lenders at the same time, so the repayments ‘stack up’. This could mean that you could find yourself in a very dire situation if you borrow from more than one lender at once, and cannot adhere to your financial repayment commitments. Credible Australian alternative lenders are working together to provide transparency for the loans they provide, and do insist on having a stacking policy.
At present, the alternative finance industry does not have any formal regulation, so weeding out the good from the bad may seem like a daunting task. Here are a few tips you can follow to ensure that you are borrowing from a reputable alternative institution:
1. Reputation – how long has the company been in operation?
Has it been through a full credit cycle?
2. Application process – how is the lender assessing your business to meet its loan criteria?
3. Knowledge – does it have an understanding of the Australian SME sector and more importantly, your industry?
What is its track record there?
Once you separate the credible lenders from the rogue entrants, you are ready to apply for a loan. Navigating the world of alternative finance may seem like an obstacle course and there are common mistakes a business owner can make.
Here are some ways to avoid the pitfalls:
1. Choose a loan that works with your cash flow – e.g. smaller, daily repayments so there is less pressure on overall cash flow.
2. Over commitment – Do not take out more than one loan at a time with alternative lenders as they are easier to get finance from. This can be a trap. Ensure your financials are correct.
3. Serviceability – Make sure you have the ability to repay your loan and allow a contingency for unexpected events.
4. Have a plan for your finances – As this is working capital, SMEs need to think what is the best way they can use the finance for their business. Allow for down turn periods.
5. Choose a creditable/reputable provider who has a long established history.
6. Choose a provider with a variety of products and solutions so that they can form a customized solution for your finance needs.
If you follow these tips, not only will choosing a reputable alternative finance lender be a lot easier, you will also avoid making costly mistakes.