Brave new world for borrowers and lenders

By Roger Byrne, Interface Financial Group

Go to any talk, forum or workshop on SME’s these days and you will be told you must ‘adapt or die’ and that you need to embrace the new technologies and the brave new world that they bring . . . What about Kodak, where are the video, book and music stores, what happened to the taxi industry are all examples of this change.

The finance industry is being affected by major technological changes as we see the development of digital currencies and peer to peer lending platforms. These will undoubtedly disrupt the traditional banking market. This does not mean that the basic financial fundamentals of a business will change.

Business finance and lending has always been about the management of risk from the lenders perspective, and the ability of small business to get a loan and the applicable interest rate will be a factor of that risk.

This has always been the approach from the banks, who have traditionally displayed a lack of flexibility with regard to dealing with small business. This is hardly surprising given that banks specialize in large volumes where it is difficult to understand the intricacies of a small business.

This has opened up the playing field for non-bank financiers to engage with small business and it is this interaction that will determine the ability of small business firstly to secure the access to capital and secondly the cost to the business of acquiring that capital.

For businesses seeking capital there are now more options available but it is still important to have good financial reporting, be able to show that the business is moving forward, and for the most part have some assets as either a company or a director. Many ‘new world’ lenders are advertising loans up to $250k approval in minutes and funds available in 48 hours, with rates as low as 6-7%, however you will find that you will need to have very good business basics to secure these terms and what will eventuate will be higher rates, longer approval times with more stringent reporting required, and some asset backing.

It is advisable to be able to lock in approval before committing to the investment to avoid placing the business in the position of having to accept higher rates.

For investors, particularly those who may use peer to peer platform lending to small business, to achieve higher rates of return e.g. from 7-20%, there will be higher risk, and that risk will not be borne by the platform providers. It is necessary to do your due diligence on any proposed transaction, as one loss on a bad transaction can write off a lot of profit from successful transactions.

Moving forward as well as ‘Buyer/Borrower beware’ we should also add ‘Seller/Lender beware’ to cover all bases.