THE PROGRESSION OF SME LENDING
Credit Providers are more aggressive in chasing SME lending market share.
Emerging World of SME Lending Lending to Small to Medium Enterprises (SMEs) has been innovating at a rapid pace.
Most recently, lenders such as ANZ and Westpac have expanded commercial lending policy for the sector. This includes extending out allowable loan terms, allowing more leverage for certain commercial borrowings and more streamlined income verification processes.
This follows a raft of activity, also stimulated by the Government Guarantee Scheme, where several lenders have extended their credit policy aggressively for SME's.
Innovation originally emerged in SMEs borrowing up to $1M. Where much like simplified processes for Asset Finance, lenders sought to make both their offering more competitive and their internal processes more efficient. The changes included:
- Extended Loan to Value Ratios (LVR's); - Simplified Income Verification Processes; and - Extended Loan Repayment Terms.
With the success of these programs, and with competition intensifying, many lenders are pushing these credit parameters out to borrowings of up to $3M.
Traditionally, the loan term and the repayment type offered, depended on a number of factors. Along with the collateral offered, there was a strong focus on the purpose for which the funds were utilised.
Lending to the SME sector without tangible security was challenging and time consuming for lenders. According to APRA data, around 50% of the $420 billion of total outstanding lending to SMEs is secured by residential property.
This is not surprising and is partly attributable to the strength of Australian house prices, which enables business owners to borrow more against the value of their property. Moreover, using a home as security for a business loan enabled borrowers to access “better” terms.
The following table is a very simplified overview of key lending parameters available, based on different types of security provided:
Lending products have been increasingly available to accommodate for different availability of collateral, income verification and repayment capability.
In terms of interest rates and terms, whilst outcomes are also driven by the risk and capital requirements imposed by banking regulators; they are responding to the Government's push for additional credit availability for SME's. There has also been a general push to reduce the reliance on residential property (often the family home) as collateral.
For example, Westpac's new policy allows an LVR of 80% against non-specialised commercial property or 100% of the value of residential property to $3M. This is supported with loan terms of 25 years for commercial property, and 30 years for residential property.
ANZ's new "Rapid Refi" product is very aggressive. It is chasing the refinancing of term lending and asset finance facilities up to $1M.
The only requirement is a review, showing good conduct, of 12 months of loan statements for loans being refinanced. Very clever and a way to increase its share of trading business customers.
So the new landscape looks more like this, again on a simplified basis which ignores some industry specific policies.
As the cost of funds fall, and niche lenders become more established, the profile of commercial lending options are changing. For example, unsecured lending is still the most expensive, but interest rates have fallen significantly. This sector will innovate further as new lenders find their rhythm in relation to loss ratios and returns, as they chase more market share and better credit risks.
Broadly, competition is intensifying as lenders chase market share for active trading businesses, where there is a "first way out" rather than relying on the strength of collateral, which is more a typical process for property deals in this category.
So the test of success of these initiatives will be seen in the coming years, along with the technology and innovation in lending that will respond to risk and opportunity in equal measure.
Perhaps this presents an opportunity for legislators to consolidate these taxes to create a simpler model for all.