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SME lending – what brokers should consider following the Victorian lockdown

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    Business lenders experienced a surge in new loan enquiries from Victorian SMEs as the state started winding back its second lockdown in October. But, according to MoneyTech CEO Nick McGrath, there is a “scary phenomenon” floating around the industry at the moment that lenders are very wary of – the zombie company.

    The post-lockdown surge

    According to McGrath, non-bank lender Moneytech experienced a 130% increase in loan enquiries throughout September and October compared with pre-COVID levels as Victorian businesses prepared for the end of lockdown.

    “As we started to see reducing case numbers and there was a bit more business confidence, our enquiries were higher than they had ever been in Victorian business.”

    SME lender OnDeck also experienced increased demand over the past three months, CEO Cameron Poolman explaining the trend was nationwide.

    “As Melbourne’s SMEs put their recovery plans into motion, we’ve seen an upward trend in applications and approvals,” he said. “July through to August saw steady growth in loan applications, however the numbers really took off in September.

    “The start of October was a little quieter, and this may have reflected uncertainty around how COVID figures – and lockdown restrictions – would pan out. But application volumes grew significantly as the month progressed and restrictions were eased.”

    HomeSec also saw a surge in loan applications, the national business lender recording a 200% increase from SMEs in Melbourne as the lockdown drew to a close.

    Non-bank lenders step up to the plate

    According to HomeSec CEO Paul Stone, the number of SMEs unable to secure finance from major lenders has reached crisis point.

    “We are receiving hundreds of calls a day from business owners who are desperately wondering how they will get funds to restart and reopen,” he said.

    “Business owners are telling us while it’s great they are finally allowed to reopen, they have burnt through their savings just trying to stay afloat, and now they can’t access the funds from traditional sources they need to reopen.”

    The requirement to show recent cashflow records as part of the application process has meant businesses with suspended trading during the lockdown, such as those in the hospitality and tourism sectors, have suffered a disadvantage when it comes to being approved by traditional lenders – something that HomeSec addresses as a point of difference within its offering.

    “As all loans need to be secured against real estate, this enables clients to be able to freeze repayments for up to 10 months if necessary,” Stone explained.

    According to McGrath, meanwhile, Moneytech addresses the issue of reduced revenue due to periods of lockdown by completing two assessments – the first being a pre-COVID assessment to ensure the business was healthy before the pandemic.

    The second assessment is based on a cashflow projection.

    “We actually work with the client and their accountant to work out what their sales are going to look like when the doors open up,” he said.

    While OnDeck requires six months’ worth of bank statements as part of its application process, this is by no means the only data source it relies on to make a loan assessment, said Poolman.

    As part of its ‘high tech, high touch’ philosophy, the online lender uses a proprietary credit scoring methodology that draws on thousands of data points to identify the financial health of a business.

    Brokers also partner with an OnDeck BDM; Poolman encouraging brokers to reach out to the lender for guidance and support.

    He added that OnDeck takes a forward-looking approach to credit assessment rather than the “rear vision view” that traditional lenders often use.

    “Only rarely do SMEs face the same market conditions in the future as they have in the past,” Poolman said. “And it makes particularly good sense today as we navigate a one-in-100-year pandemic when SMEs have faced exceptional circumstances that are not indicative of normal conditions.”

    What brokers should consider when helping SMEs with finance

    McGrath said it is important for brokers to have a clear understanding of the financial relief SME clients have accessed during COVID-19, including rent deferrals, supplier assistance and government subsidies, as well as the sum total of their debt.

    “There’s a bit of a scary phenomenon that’s floating through the lending industry right now,” he noted. “A lot of lenders want to avoid what is called a zombie company.

    “A zombie company is a business that was trading pre-COVID that is no longer trading or has decreased trading, but is still only alive because of government assistance.”

    Because of this risk, collating a comprehensive report of the client’s financial relief obligations will go a long way in securing a loan approval, he said.

    He added that brokers need to be wary of the effective interest rate a customer could incur through some business lenders – many of which could be astronomical on closer inspection.

    “SMEs are not covered by the same consumer responsible lending laws that home loan customers are,” he said.

    Poolman believes transparency in lending is paramount; OnDeck is championing the use of the SMARTBox loan comparison tool in Australia.

    “This allows brokers and business owners to understand the true cost of business finance, and make informed decisions around the return on investment of any asset being financed,” he explained.

    He said OnDeck provides fair pricing and clear terms on its loan products, building trust through transparency.

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