Bank aversion to unsecured SME loans and an inability to accurately price business risk has led to a $240 billion yearly opportunity for investors to enter the SME debt market via peer-to-peer and marketplace mechanisms, according to online marketplace invoice lender, FundX.
FundX believes this opportunity is likely to increase as banks tighten their lending amid global stock market volatility and pressure from APRA, opening the door for peer-to-peer and marketplace lenders with more sophisticated credit assessment technology to rapidly scoop up market share.
“Assessing and pricing risk in the SME debt market can be highly challenging as business owners often struggle to demonstrate evidence of cash flow, credit history, or financial status and behavior,” said David Jackson (pictured), CEO and founder of FundX.
“For this reason, banks often take a far more conservative approach than is necessary, or price their loans substantially higher than they do for larger enterprises – despite SMEs being far less able to absorb this expense into their budgets.
Who will pick up where the banks stop?
“Credit decisioning tech-platforms that leverage data counting packages, big data and machine learning, on the other hand, are able to overcome these challenges by assessing non-traditional data en-masse, including hundreds of online and social media data points,” continued David Jackson.
“The outcome is forward-looking risk-adjusted pricing based on current, not past, performance, negating the need to provide mountains of paperwork or demonstrate a lengthy credit history.”
The figures came from Reserve Bank data that demonstrated that around 25,000 SME loans valued at around $20 billion are being rejected needlessly each month in Australia, adding up to $240 billion dollars over the course of each year.
A research report by Macquarie Bank into the threat posed to banks by fintech additionally stated that “digital disruption is the #1 issue facing the (banking) industry today” and that “the longer-term threat remains lending disintermediation”.
The report also noted a number of occasions where banks had attempted to upgrade their technological capacities in order to keep up, but that they were “running materially over time/budget”.
What does the future of SME lending look like?
Ex-Commbank and Royal Bank of Scotland employee-turned-fintech founder, John Pellew of financial data analytics firm, Othera, believes the issue is structural within the banking system and so is unlikely to be resolved quickly.
“The business models of banks are simply not designed to adequately support unsecured or small business lending, and their technological capabilities are significantly behind those of alternate lenders who are able to move much more rapidly and personalise loans more accurately to individual applicants,” said John Pellew, founder of Othera.
Australia’s 2 million SMEs employ around 70 per cent of the workforce and account for over half of the output of the private sector, rendering their health vital to the health of the Australian economy.
“By not servicing this all-important market segment, we are strangling the engine room of the Australian economy – small business,” concluded David Jackson.
What exactly does FundX do?
FundX is a marketplace invoice-financing platform that uses big data, machine learning and predictive algorithms to provide risk-based funding to SMEs where bank finance is unavailable.
Founded by serial entrepreneur, David Jackson, it allows SMEs to advance funds on the receivables of their clients. Its technology platform provides a loan decision in less than one minute, and funds are delivered within 24 hours.
Because it is integrated directly into a business’s accounting software, selected invoices can be cleared immediately, regardless of how long it takes customers to pay.
FundX loan rates begin at 1.5 per cent, compared to traditional invoice factoring companies and the big four banks which have rates of around 4 to 5 per cent when all fees and charges are taken into account.
A decision on the application can also be made in under a single minute, and funds delivered to approved applicants within 24 hours.
Since its soft launch only a few months ago, FundX has taken enquiries of over $4 million and has funded close to $1 million of invoices without a single dollar spent on marketing. It is currently in negotiations for a $10 million facility, and a capital raise from sophisticated investors and a number of financial institutions.