If your business has been operating smoothly for the last couple of years, you might be thinking that now is an excellent time to take out a business loan to take it to the next level.
You might have expansion plans, perhaps opening another store, putting on more staff, or buying the premises for your business?
You have to factor in many variables when securing a business loan, such as interest rates, APR’s, even working out which assets you’ll need to give the lender as collateral. And, probably the most critical decision you’ll need to make in the loan process is whether to get your loan from a bank or a non-bank lender.
But, like many SME’s you might not know the difference between the two types of institutions and the various pros and cons.
The following will help you break down the difference and hopefully point you in the right direction.
Investopedia defines non-bank lenders like financial institutions that are not considered full-scale banks because they do not offer lending and depositing services.
According to the Australian Financial Review, Non-bank lending to hit $50b by 2024 as major banks cut back.
Non-Bank lenders are much smaller than your typical banks, such as Westpac, ANZ or Commonwealth and can therefore not offer the depth of funding that these large commercial banks can offer.
Some of the benefits of non-bank lenders include the following.
1) The lending criteria are often less stringent and tight, which opens up the doors for many small businesses looking to obtain cash to grow that might not have the trading history that banks would require. For startups and SME’s that are only a couple of years old, non-bank lenders are the best option to fund their business goals.
2) The fees with non-bank lenders are lower, and there are often zero set-up fees.
3) They are often more negotiable and much more flexible than banks. You might be able to wrangle better rates, fees and repayment schedules. Also, the customer experience with banks, as we all know, can be terrible, which is why non-banks are often a more viable option.
4) You can often get shorter repayment terms. The business might be booming, and non-bank lenders might be able to rearrange your loan so you can pay it off sooner. Flexibility is peace of mind for many SME’s that have faith that their business will grow quickly and those heavy monthly interest repayments won’t be strangling them for years.
5) Faster application process, which can be done online or over the phone. Plus, you can generally get your loan approved SO much quicker than a bank. Overall they are much more sympathetic to SME needs than banks that can have brick walls put up if there are issues or repayment problems.
6) In many cases, non-bank lenders (like Sparrow Loans) can approve your business loan within 48 hours and have funds into your account within 2 weeks.
7) If you have had a minor hiccup in your credit history or credit score, many banks will zero in on this and refuse your loan whereas, non-bank lenders might be able to look past this and secure the loan because they are more business-friendly.
8) Many non-bank lenders also offer unsecured finance options, which are great for small business startups that may not have the collateral to put up as security. These are usually much more expensive as they are perceived to be riskier than a loan that is secured by assets like property or equipment, in the event that a business is unable to repay a loan at the end of the loan term.
9) SMEs looking for a small, fast injection of funds will tend to favour non-bank lenders, making sense as they are willing to be much more cooperative than banks.
Traditional Bank Lenders
Traditional banks in Australia have a reputation for being difficult to deal with, but this doesn’t mean that they are unwilling to help SME’s with their small business loans.
I have stated the benefits of non-bank lenders, but there are a few advantages of dealing directly with the banks; however complex and straight-laced.
1) Banks have a layer of regulation from the Australian Prudential Regulation Authority, which adds more security to the institution you are borrowing. They must follow the rules and regulations to the letter, which adds a certain comfort level for borrowers.
2) If you already have an account with the bank and solid trading history, they might be more inclined to loan you money. Banks will still require you to complete a mountain of paperwork to secure a loan.
3) You might be able to borrow more money as banks are larger, particularly if you need a loan upwards of $5,000,000. Plus, they will be able to offer more extended loan repayment periods. Many non-bank lenders will have an unsecured lending ceiling between $250,000 to $500,000 – some will go as high as $1 million, but you will have to meet very strict requirements in order to obtain this facility with a bank in exchange for a more competitive rate than the private lending or non-bank space. For secured loans with a cheaper interest rate, you will have to offer some form of security, such as your home.
While there are specific pros of getting your finance from a bank, there are some definitive cons such as:
1) Their time to approve and pay you your loan can be weeks if not months!
2) Bank will often require security for even the smallest loan, which puts loans out of reach for many small businesses. While they can lend a larger amount they require a greater amount of security relative to the loan amount – such as a 50% or 60% LVR – when it comes to businesses and commercial loans. Non-bank lenders are not constrained to these strict parameters.
3) Banks can be very conservative with their lending appetite as they have many businesses to choose from when they decide who to lend to and who to decline. Due to their long loan terms and cheaper rates, they can decline a good business ( which would seriously affect cash flow ) that would be easily approved in the non-bank space.
Non-bank lenders like Sparrow Loans are here to help small businesses with their loans and fill the gap that the banks create. We like to think of ourselves as your growth partner that understands your business strategy. Whenever you need extra funds quickly, we are only a call away.
You might have been dealing with banks for years and might have loaned money in the past but try working with Sparrow Loans, and you will see a huge difference in the approval and settlement process.
If you have any questions or want to know more about our business loans, contact us today.