East’s research into the Australian
markets continues to show a major dichotomy between the smaller and larger
Smaller businesses have more adversarial relationships with their banks,
find it harder to get credit, and feel under-serviced in comparison with
larger enterprises. And almost half of Small and Medium Sized Enterprises
have had their lines of credit repriced upwards in the last 12 months, and
this in an environment where interest rates have been moving lower.
With this in mind, East recently asked a series of questions of all
business segments, based around their interest in engaging with lenders
from outside the mainstream banking system for funding, other than through
debt capital markets.
Anecdotally, there is much talk in the market about smaller businesses
turning to non-bank lenders out of a perceived lack of choice and real
competition amongst the major banks, and East wanted to test the appetite
for this. Already, East’s research has found half of SME businesses who
apply for, but don’t close on new credit lines with their banks walk away
from the process, mainly based on the terms and conditions imposed, and
the difficulty of the application process.
In this context, were they then more inclined to turn to non-bank lenders?
The results showed that 26.8 percent of Micro businesses - or those
turning over between A$1 and $5 million a year – have considered making
use of non-bank financing for their business in the last six months.
The interest in non-bank financing declined as the size of the business
increased. 23.3 percent of SME businesses turning over $5 to $20 million
have considered non-bank financing, but only 8.3 percent from the
corporate segment ($20-725 million annual turnover) and 1.3 percent of
Institutions (more than $725 million in turnover) have actively considered
The results are reinforced with
businesses asked how likely they are to consider borrowing from lenders
outside the mainstream system on a scale of 1 to 5, where one was “very
likely” and five is “most likely.”
Micro businesses are the most likely to engage non-bank lenders, with the
segment rating it at 1.98. At the other end of the spectrum, Institutional
businesses rate their likelihood of doing so at 4.47, a strong repudiation
of non-banks from this segment.
The results reflect the difficulty in accessing appropriate credit by
smaller businesses from mainstream banks, underlining just how focussed
banks are on larger business customers.
Asked to reveal if approaches from competitor banks had increased or
decreased in the last six months, a significant 55 percent of
Institutional sized businesses reported an increase. At the same time,
only 11.5 percent of Micro businesses said competing bank approaches have
Putting the two sets of insights together adds some more meat to the
emerging picture. Banks appear focussed on larger business customers and
are putting greater efforts into winning their business. In this scenario,
it is little wonder that Micro and SME businesses are showing greater
interest in non-bank funding.
East’s research also shows Micro and SME businesses are in re-leveraging
mode: they still deposit more into the banking system than they borrow but
that ratio is coming down rapidly.
It all suggests a “moment” in the market for a lender serious about taking
on SME credits. The major banks’ attention would appear to be on larger
businesses, so the SME opportunity is still there for a lender – bank or
non-bank – which wants to embrace the smaller market segment.