A revolution in small-business financing is seeing alternative lenders galloping to the rescue
By Tim Ladhams
There is a revolution going on in small-business lending, with a growing number of alternative lenders challenging the hegemony of the big banks in this space. Inside Small Business spoke to David Brennan, founder and CEO of small-business lender Kikka Capital, about the new types of loan now available…
People aspiring to start their own business say that barriers to finance are among their biggest concerns. Is this your experience, too?
Absolutely. Many people don’t know where to start looking for funding.
What problems does this cause?
There is a big difference between what banks want and what SME owners can offer. They usually do not have equity in their home so have to look at other sources for finance.
Is it easier to obtain an unsecured loan these days?
It is now, with the rise of alternative lender sources. All investors want to see runs on the board, but it is what constitutes those runs that Is making life easier today. Traditional lenders prefer secured loans, or years’ worth of financial records before considering an unsecured loan. Alternative funding services look at the health and performance of a business, and are prepared to lend on an unsecured basis as long as the business has growth potential. They don’t need historical data, just where the business is at and where it is tracking
So is it more time-consuming and expensive to go to a bank?
Banks use a one-size-fits-all model, so haven’t dedicated resources to structuring and pricing micro-business loans. Alternate lending institutions can customise their products for start-ups.
Are these products refined?
Changing requirements and developing technology make this an ever-evolving area. Firstly, new lenders anticipate what people will need, then discuss individual requirements with potential customers and refine their products accordingly.
What about technology?
Lenders realise that many new business owners are not tech-savvy, so the processes have to be simple. Kikka Capital’s process has three stages:
1. ABN/ACN and basic info on a business
2. Analysis of customer’s bank transactions via a secure link
3. Information about the business the owner can easily access via their smartphone, tablet, or PC. It can all be done in a matter of minutes, as opposed to the six to eight weeks more traditional loans take to process.
If an application is successful, does the business need to borrow the full amount immediately?
No. While the line of credit is offered immediately, it does not have to be taken up. Sometimes people wait weeks or months, and it gives business owners confidence they can afford the loan if they need it.
Is there a cut-off point?
We constantly underwrite the line of credit based on their performance, so the amount that can be borrowed on any given day changes based on how the business is performing. This means the loan depends on the health and performance of the business itself rather than the value of the collateral.
Is there a generational disparity between people who adopt these new funding sources and those who rely on traditional lenders?
Initially, alternative funding was adopted almost exclusively by millennials, but increasingly baby boomers are looking this type of model. The owners of younger start-ups do not own their own home and don’t have enough data to secure loans from banks.
Is it partly because baby boomers are more risk averse?
Absolutely. Millennials are the first to use the technology, but baby boomer borrow only a small percentage of their line of credit initially but come back for more once they have proved it works.
This article first appeared in the Summer 2017 issue of Inside Small Business Magazine
Ladhams, T. (2017, Jan). Hi Ho, Silver – It’s the new Loan Arrangers. Inside Small Business, 1(15), 45.