- Anthony Roberts/
- November 2019/
What’s changed over the last 12 months in the world of SME funding – and what should small businesses look out for in 2019? Anthony Roberts, Managing Director of equipment finance specialist Eclipx Commercial, investigates.
As in our everyday lives, ongoing technological developments have had radical impacts on small businesses – for good and bad. Every small business is acutely aware of these – from the possibilities and threats of e-commerce expanding customer horizons, to the efficiencies of accounting software or logistics services, to digital marketing.
On the positive side, tech has opened up access to more financing options through fintech and online lenders. We heard repeatedly over the last year that funding options for SMEs are tight and, post the financial services Royal Commission, liable to get tighter in 2019.
2018 brought further business loan developments, from bad press for some fintech lenders over unfair contract terms to online lenders signing an industry code of practice. But last year also saw a general shift away from traditional bank loans and towards more specialist, nimbler alternatives – whether fintech or not.
Specialised financing options can offer robust and economical – complementary or alternative – funding sources to bank loans. For example, if you need to buy or replace assets this financial year, consider buying them with asset or equipment financing and reserving your cash for other activities instead.
Warren Buffet said that it is only when the tide goes out that we see who has been swimming naked – and between the internet and the Royal Commission, a fair few financial services have had their lack of swimwear spotlighted. Going forward, small businesses will need access to these non-bank lenders more than ever, but they also need to be able to spot the “emperor’s new clothes” when it comes to financing deals.
New regulation will help
Fortunately, a new regulation – Australian Prudential Standard 120 (APS 120) – came into effect last year, which allows quality finance providers better access to capital markets, and therefore to a lower cost of funding. This, in turn, should mean small businesses get lower leasing costs and more flexible terms overall.
APS 120 regulates securitisation – in simple terms, the practice of pooling illiquid debt, usually loans, into tradeable securities. Most small businesses don’t need to understand the ins-and-outs of this particular regulation because it applies only to financial services companies, but it does spell good news to counter shrinking bank SME lending.
APS 120 was drafted with the intention of providing financial services companies, including asset finance providers, more flexibility in their funding arrangements and a simpler set of requirements. At the same time, it requires more conservative (in other words, low risk) capital requirements for some types of exposure. But the overall effect is that quality asset finance companies with strong treasury functions and risk management competencies will be better placed to offer competitive financing offerings to small businesses.
Stronger regulation means a better deal for consumers
While securitisation can be a very capital-efficient way of funding (a.k.a. cheaper), not all pools of securitised assets are created equal. A company with strong risk management practices will be able to assess the credit worthiness of the securitised assets, the risk weightings applied to certain asset classes, and the overarching liquidity of the pool in order to protect customers.
Listed companies are subject to stringent capital adequacy ratios and are required to provide a high level of transparent communication to shareholders, investors, the market and regulators. They also typically have better access to capital markets and are therefore able to be more competitive on price.
This means identifying such a finance provider – with good risk management, knowledge of the assets, fair contract terms, a hefty balance sheet and accurate pricing – is important for small businesses looking for funds.
What to look for in a financing partner
Even with APS 120 there to regulate financiers, 2018 taught us that small businesses must carefully consider their options. There are a few key indicators that small businesses should look for in a finance partner.
Here are the four T’s of shopping for a lender:
1. Technological investment
Finance companies that make a significant investment in technology, such as Eclipx Commercial, are more likely to be at the forefront of service delivery and pricing, and will therefore be able to offer a better solution to customers.
For example, bespoke product platforms that link products to credit approvals and a risk management platform means that, as a customer, you can be confident that your information is being used appropriately, and that the finance solution you are offered best reflects your credit history and risk profile.
Integrated technology also means less paperwork for small businesses with tight time resources, better management of data and better risk management. In other words, a better match between the finance offering and the business’s needs.
It’s crucial that a finance provider can help navigate and mitigate complexity – specialists in their field should know as much about your business needs as you. For example, if you chose to use asset financing to lease a piece of equipment, your lender should understand your industry, business and its financial structure – but also the equipment itself, its maintenance, purpose and lifespan specifics. They should be clear about contract terms, the structure of your loan, your payment schedule and your options at the end of the lease.
3. Track record
It’s important to look at the earnings and results of a finance company you are considering doing business with. We all know that past performance is no guarantee of future performance, but a long track record of earnings growth, profitability and above all, customer satisfaction are important indicators of robustness.
These kinds of metrics are usually available online or, if a company is listed, on the ASX website where they are required to post half yearly and full year earnings. Eclipx Group, Eclipx Commercial’s parent, is one of the leading non-bank finance companies and is listed on the ASX making it easy to find such information.
4. Total service
You shouldn’t just sign a deal and never hear from you provider again. You should look for a partner that provides an end-to-end service and leverages their expertise to help you get the most out of your loan.
For example, if you’ve taken out an asset finance loan, the cost of the lease over the lifetime of the equipment is made up of two parts – the ongoing costs of the lease and the residual value at the end. That’s why accurately pricing the residual value of the leased equipment is so important – it affects the lease payments as well as the total lease cost.
At Eclipx Commercial, for example, we have access to a huge amount of data about prices of assets over the length of their life through the Eclipx Group’s ownership of Australia’s largest auction house – Grays Online. This makes us specialists in the lifespan of equipment allowing us to accurately price the lease and help dispose of the leased equipment at the end of a contract.
We hope 2019 is a great year for Australia's small businesses, and we look forward to continuing to support their growth and sustainability. Financing may be getting tighter, but there are some strong options in the market if you look a little wider than your go-to financier. With the right partners, Australia’s SMEs can flourish.