The majority of small and medium enterprises (SMEs) still depend on traditional bank loans for funding, but there are new players on the market that are great alternative options.
Alternative lending platforms have caught the attention of small businesses, and the results are very promising.
Slowly, Steadily Growing
According to the first Banjo Small Business Finance Survey, about 3% of SMEs used alternative financing in 2015. While this may seem small, this is still equivalent to about $7.5 billion in funding.
Around 6% of respondents also said that they intended to use an alternative provider within the next year, while more were still considering it.
How good was the experience of those who tried it out? All nine out of ten of these businesses preferred their experience with alternative financing to banks. That’s pretty impressive. This shows that there is a strong potential market for such services, as the providers are meeting needs in a way that surpasses traditional options.
The New Face of Finance
When asked what they liked about alternative financing, the top reasons given were transparency, flexibility, and cost. This is the general sentiment of what the industry’s biggest advantages are, and why it has grown so fast.
Lending platforms provide simple solutions that have no hidden fees, so borrowers have an easier time calculating their total costs and cash flow. Companies like Capify can even provide tailored business finance solutions based on the customer’s needs. Because alternative lenders also have lower marketing and overhead expenses, they can pass the savings on to their clients in the form of affordable credit.
Disrupting the Status Quo
We’ve spoke before that traditional lending institutions are vulnerable to online disrupters. A bank can take weeks to process an application, while alternative financing companies will approve yours within the day. It’s simply an industry with a more agile, customer-friendly offering, and it’s definitely starting to shake things up.
There is enormous room for growth too, as one of the biggest barriers right now is awareness. Of the surveyed SMEs in the Banjo Small Business Finance Survey, only 16% even knew of alternative finance providers. As more companies find success in the coming years and share their story, though, this number will likely go up.
Global Growth on an Unprecedented Scale
It isn’t just Australia that’s seeing a rise in the popularity of alternative lending. The industry has seen explosive growth in multiple countries over the past years, and the best part is that it’s still in the early stages.
In the UK, for instance, alternative financing was responsible for £3.2 billion (A$6 billion) in investments last year. The sector grew by 84% from 2014 to 2015 – an impressive accomplishment, but dwarfed by the previous year-on-year growth of 161%.
The US also has one of the world’s biggest alternative financing markets. It’s estimated that online small business lending will reach $5.2 billion in 2016. To put things in perspective, it was only $2.3 billion in 2014.
Fintech: Keeping the Financial Sector on its Toes
Online lending platforms are part of “fintech”, or financial technology. This is an emerging services sector that uses technological innovation to provide better, more convenient solutions. In addition to lending, this growing industry includes companies in bills management, online payments processing, and various other financial needs.
Investment in financial technology ventures has been rapidly increasing over the past few years, and is projected to be worth roughly $8 billion by 2018. Companies in this sector have shown remarkable success, managing to take significant market share. A report stated that the dissatisfaction of customers with their current providers has created opportunities for digital competitors.
It’s a burgeoning industry, and one that has done a remarkable job of disrupting the finance world. Because of this, banks too are developing their own technology to keep up with the marketplace’s new demands. Statista mentions that, “as of February 2015, bank spending on new technologies in North America was projected to reach 17 billion U.S. dollars in 2015 and increase to 19.9 billion in 2017.”
Clearer Regulations in Sight
One of the roadblocks that Australian fintech companies have to deal with is the lack of clear regulations. They must navigate a complex maze of rules, trying to figure out what does and doesn’t apply to them. Thankfully, this seems like it’s about to change; Treasurer Scott Morrison has announced a new set of regulations to support the fintech industry’s growth.
Many of the benefits are targeted towards start-ups, as it removes the need for extensive regulatory license applications. These can cut into a fintech companies seed capital, often before they could even test the viability of their business model. Under the proposed regulations, new companies would have a controlled environment to gather the data they need.
This comes at just the right time, as the industry is poised to become increasingly competitive. If Australia manages to loosen the red tape, it could encourage the growth of fintech as a whole within the country. The less time and resources spent on trying to comply with regulation, the more that can be used on improving core services.
It’s clear that the online finance industry is only going to become larger and more effective as time goes on. Capify is one of the pioneers of the industry, operating since 2008 and having completed over 24,000 funding transactions.
As more SMEs start turning to alternative financing providers, our goal is to continue meeting and exceeding their expectations.