Alternative finance, otherwise known as online lending, is on the rise in Australia. KPMG research shows we have overtaken Japan to become the second largest alternative finance player in the Asia Pacific region, second only to China.
If you’re a small-to-medium business (SME) that hasn’t yet tried borrowing funds through an alternative finance lender, read on. Our interview with the small business online lender, OnDeck Australia, explains what alternative finance is all about and how it differs from traditional lending. Here is what Michael Burke, head of Sales at OnDeck, had to say.
Our question: Alternative finance is touted to be more innovative than traditional lending; why is this?
Michael’s answer:
Online lending has transformed how SMEs can access and secure financial services by leveraging data and analytics to drive informed and responsible credit decisions.
Compared to traditional financiers who rely on the equity of the business owners property when assessing a credit limit, OnDeck evaluates businesses based on their actual performance rather than business or personal assets. We assess a business’s capacity to borrow based on what their cash flow looks like.
At OnDeck we have developed a proprietary credit model called the OnDeck score, which is fed by two key data points – the bank data that borrowers provide to us and the data supplied by credit bureaus. This data and analytical approach enables us to make informed decisions when evaluating a borrowers creditworthiness. When you consider we’ve lent $10 billion over ten years, it’s easy to see how our data points play a significant role in how we assess credit in a responsible way.
Our question: For established SMEs who have long-term relationships with traditional lenders, how would they benefit from turning to alternative finance?
Michael’s answer:
Online lenders give SMEs the ability to make timely financial decisions for the benefit of their business. A small business may have to wait up to 6 weeks to get a response from a traditional lender, whereas online lenders can reduce this timeframe to between 24 and 48 hours.
Customers can submit a loan application to OnDeck at 9 am, and by 5 pm the same day some customers can access the required funds. This speed is possible because OnDeck’s credit-decision model is based on making informed credit decisions around data points that can be accessed quickly through bank statements and credit bureaus.
Let’s take the example of a small business who has been offered a 30% discount on the face value of the invoice by a foreign supplier if they can pay in the next 30 days. To go to a traditional lender and get an overdraft increase could take up to 6 weeks. Therefore the SME loses out on this valuable opportunity.
SMEs need to operate swiftly to take advantage of these types of opportunities. It’s by working with like-minded financiers that this can be achieved.
Our question: Do you have to be online savvy to use alternative finance?
Michael’s answer:
No, you don’t have to be online savvy because alternative finance isn’t about removing the customer interaction. In fact, at OnDeck, helping customers is a significant part of our application process – each customer is assigned a dedicated loan specialist who guides them through the application, all the way to loan approval and funding.
When borrowers come to us to put in a loan application, they have the option to submit their bank statements either in hard copy, as a pdf file or through online bank statement technology.
We're also able to provide customers with access to the loan contract through DocuSign, where the terms and conditions are clearly outlined. We get a notification when the customer has reviewed and approved the deal, and we can fund online the same business day.
Our question: If banks are cautious about offering finance to small business, why are alternative lenders able to lend?
Michael’s answer:
We are not lending where banks don't lend; we lend in a timely fashion. Because a small business can't get finance through a bank doesn't mean that an online lender is going to give them money.
All lenders have credit criteria to meet. OnDeck’s criteria includes that a business must be established for 12 months, have an annual revenue greater than $100,000 and more than three deposits going through their bank statements every month. We also require a minimum credit score of 500, and factors like time in business influence this score.
Our question: Are there risks involved with alternative finance that are not present with traditional lenders?
Michael’s answer:
The alternative finance industry has taken the bold step to be ahead of the market in establishing transparency. The SMART Box™ tool was designed for this very purpose – to provide standardised pricing disclosure to SME borrowers.
Initially developed in the US and launched in the Australian market earlier this year, SMART Box™ provides multiple pricing metrics to help small business owners better understand and assess the cost of their loan. It enables a borrower to compare financiers and understand exactly how the pricing metrics differ across each loan offer.
OnDeck was a leading partner in the establishment of SMART Box™, both in the US and Australia and since then a number of Australian alternative finance lenders have signed the Code of SME Lending Practice, all committing to providing this tool to their borrowers.
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