No matter where you go in the world, small business is the lifeblood of any economy. A whopping 98.2% of all companies in America have less than 100 employees. You’ll find similar figures in other major economies – 97.9% in Canada, about 98% in Australia, and 97% in New Zealand.
When systemic blockades impede the flow of capital to SMEs, the broader economy suffers. Australia found that out the hard way in 2017. During that year, The Royal Commission into Misconduct in the Banking Industry uncovered lax lending standards in the Australian financial industry.
In response, the Big Four took massive corrective action. Suddenly, loans were much harder to secure. As a result, many businesses shelved expansion plans or laid off staff. Some even went under.
Whilst reasons differ throughout the world, borrowing through traditional channels has become more difficult. These developments have left a gap that private lenders have rushed to fill. Because of their intervention, small business lending has picked up recently.
In today’s blog, we’ll talk about the lending climate around the world. From Australia to America, things appear to be looking up.
Australia
The last few years have not been kind to
the Australian economy. First, China’s economy began to slow down. Then, the
Royal Commission revealed how corrupt the Big Four banks were. And now,
steadily worsening bush fires have disrupted tourism and other sectors.
It all started as a stagnating economy made it harder for Australians to
sustain rises in home prices. Then, a Royal Commission-induced credit crunch
arguably led to the sharp valuation drop experienced during 2018-2019.
All of a sudden, business owners couldn’t use their homes as collateral to get
secured loans. As prices fell, banks didn’t know whether their value would
cover the loans they were issuing. This development led to a massive gap in the
lending market.
Growing businesses couldn’t access the capital they needed to scale their
operations. Even worse, companies experiencing cash flow issues were struggling
to make payroll. Thankfully, private lenders swooped in to pick up the slack.
Prospa is one of the most prominent players in Australia’s alternative leading
market. In FY2019, they reported 501.7 million AUD in loan originations – a stunning 36.6% increase YoY.
Smaller lenders are seeing even more explosive growth. Wisr’s loan originations
soared 409% YoY in FY2018. Meanwhile, SocietyOne expects to grow to 1 billion
AUD in loan originations after reporting a figure of 600 million AUD in March
2019.
What does the future hold for small business loans in Australia? To be honest, things could go either way. The last year has seen home prices stabilise, and the government rescinded their mortgage stress test. However, Australia is in the midst of their worst bush fire season yet. On top of that, there are whispers behind the scenes that some lenders are taking on too much risk.
One thing is clear, however. In the wake of tightening lending, private lenders have provided entrepreneurs with an alternative way to grow.
America
Judging by the stock market, official
government statistics, and Donald Trump’s tweets, the American economy appears
to be on fire. Beneath the surface, though, a different picture emerges – one
of frustrated small business owners.
Their aggravation with legacy lenders goes back decades. Since 1995, major
American banks have been steadily reducing their exposure to small businesses.
In the mid-1990s, these institutions issued 34% of their loans to SMEs, as per
FDIC figures. By 2015, though, banks only lent 20% of their loans to small businesses.
Meanwhile, demand for financing has gone in the other direction. In 1995,
financial institutions lent about 350 billion USD in capital to small
enterprises. By 2015, that figure had nearly doubled to 600 billion USD. And
yet, almost half of business owners report trouble accessing the credit they
need.
This environment has created a target-rich environment for non-bank lenders.
Kabbage is one of many private lending firms that has taken advantage of Big
Finance’s reluctance to engage SMEs. Through the 2010s, they lent out over 6
billion USD to their customers. They doled out 2 billion USD in 2018 alone.
OnDeck, a NYC-based lender, has also experienced a great deal of success. It
has 1.1 billion USD in loans on its books and originated 650 million USD in
loans in Q3 2018 alone. The tech giants are getting in on the action as well.
Square, a subsidiary of payment processor PayPal, has extended 3.5 billion USD
in loans since its founding in 2014.
How are they outflanking the banks? Despite criticisms, they are taking on
“riskier” clients by using new, innovative ways to evaluate risk. By analysing
everything from chequing account activity to social media feeds, proprietary
AIs are identifying new customers.
What does the road ahead look like? Coronavirus fears notwithstanding, a slowing
economy appears likely. Nonetheless, Kabbage executive Kevin Phillips remains
confident. He says their systems can recognise recessionary signs in real-time,
allowing them to adjust their market exposure on the fly.
Canada
These days, the story of the Canadian
economy is that of two solitudes – east and west. In 2015, oil prices plunged,
as Saudi Arabia, Russia, and the USA pumped millions of barrels/day of new
supply into the global market.
Depending on where you lived, this had radically different effects. Eastern
Canada surged ahead, as cheaper energy and a low Canadian dollar boosted
manufacturing and other industries. Meanwhile, the West (except for the Lower
Mainland of BC) tanked, as energy-dependent economies shed jobs by the
thousands.
In 2019, persistently low energy prices continued to hurt Western Canada. Even
so, small business lending continued to be healthy nationwide. According to a
report released by TransUnion in September 2019, business credit balances grew 6.1% YoY. Meanwhile, delinquent accounts fell to 1.95%.
Where are Canadian entrepreneurs getting their funding? Despite being America’s
northern neighbour, many get funded through traditional sources (banks and
government programs.) Despite this, private lenders are starting to make
inroads into the Great White North.
According to Crowdfund Insider, Lending Loop has extended 50 million CAD in
loans as of September 2019. However, Thinking Capital is the undisputed leader
of the Canadian non-bank lending industry. As of 2019, they had issued more
than 1 billion CAD in small business loans.
The future of Canadian private lending appears to be bright, recessionary
headwinds notwithstanding. Economic conditions will toughen nationwide in 2020,
which could dry up traditional sources of capital. If this happens, fintech
startups stand ready to fill the gap.
New Zealand
Whilst small in population and geographic
size, New Zealand ranks well in economic output. The fact the New Zealand
Dollar (NZD) is the world’s tenth most traded currency is remarkable,
considering its isolation.
Whilst agriculture, small-scale manufacturing, and internet-based businesses
all contribute, tourism is New Zealand’s most prominent industry today. The
shooting of The Lord Of The Rings Movies changed this island nation’s fortunes,
as did cheaper airfares.
Growth continues to surge under Jacinda Ardern’s leadership, even after a cool period in the
housing market. However, businesses eager to scale their operations have more
than the banks to rely upon. Private lenders have arrived in New Zealand,
offering easier and faster approvals.
Prospa, flush with cash after growing revenues dramatically in Australia, has
been in the country since 2018. In their first ten months, they extended 24
million NZD in loans. Overall, they estimate the private lending market in NZ
could grow to 4 billion NZD per year.
Other players include Bizzloans and peer-to-peer lenders like Lending Crowd.
New Zealand is indeed a small market. However, considering its lack of disruption,
short-term growth seems inevitable, no matter what the economy does.
South Africa
It’s a daily struggle. Corruption and
government mismanagement have saddled South Africans with an economy that is,
at best, dysfunctional. Its main problem? A systemic lack of confidence, mostly
spurred by the struggles of its debt-plagued power utility, Eskom.
Unpredictable power cuts caused by deteriorating infrastructure have made it
hard to attract foreign investment. After all, it’s hard to run an assembly
line without a reliable source of power.
On top of this, unemployment in South Africa has soared to depressing highs. As
of February 2020, the official rate stood at an unfathomable 29.1%. When that many people are out of a job, the velocity of capital
slows to a crawl. With a lack of money sloshing about, banks are reluctant to
lend. It’s a vicious cycle.
Despite the gloomy atmosphere, South African fintech startups are providing the
economy with a much-needed injection of cash. Firms like Lulalend, who
attracted 6.5 million USD in series A venture funding in 2019, are leading the
charge. Whilst they haven’t disclosed revenue figures, their loss rate is
presently below 4% – a great sign of profitability.
Fundrr is also making waves. Founded in 2018, this firm has grand plans. Over
the next five years, they plan to extend over 1 billion ZAR in loans to South
African SMEs. They are bankrolled by an unnamed Cape Town angel investor, who sees
the opportunity in a market that suffers from an 86 billion ZAR credit gap.
Non-Bank Lenders Are Helping Entrepreneurs Realise Their Dreams
Unless you have a wealthy uncle, it can be
tough to scale a business to profitability. In the past, banks have filled this
role. However, in the present day, many are too timid about lending. In
response, private lenders have stepped in.
From Brexit to Coronavirus, SMEs face many challenges in 2020. But, with a
steady source of credit, these enterprises won’t just survive – they will
thrive!