Staying afloat through the crisis with non-bank finance
The COVID-19 economic crisis created many challenges for businesses across Australia. Many have struggled to survive for want of cash flows. Banks are bound by their set rules, and have been frequently unable to extend the necessary financing. Fortunately there are other sources of funding, such as NBFIs.
Non banks
Non-bank financial institutions (NBFIs) are organizations which are not fully fledged banks. Yet, they offer many of the same services locally, and on a smaller scale. The Reserve Bank of Australia refers to them as Non-ADI Financial Institutions. There are multiple types. They take specific niches in their areas of expertise. Pepper Money, Virgin Money, and Resimac are some examples.
NBFIs have been helping small businesses long before the start of COVID-19. They offer ways for small entrepreneurs, business owners, and investors to diversify their capital. Many small businesses use them as an alternative to letting one conventional bank handle all the capital. Because of the way they function NBFIs are excluded or exempted from the formalities of banks. This gives them more flexibility than conventional banks.
Microcredit
Microcredit organizations are institutions that offer loans so small in value that they do not require conventional collaterals. These can be great funding options for new and small businesses which lack a long and exemplary credit history. Millions of migrants live and work in Australia. Most send international money transfers to their home countries as remittances. Several of them take up one of many opportunities for entrepreneurship that Australia has to offer. However, newly arrived immigrant entrepreneurs sometimes cannot furnish the mandatory collateral that banks demand before extending loans. Such situations make microcredit firms the obvious solution. Microfinancing deals are often quite flexible and personalized, which is advantageous for startups.
Flexibility
NBFIs and microlending organisations can be much more flexible compared to conventional banks when extending credit. This is owed to several factors. NBFIs are not regulated by the same entity as banks. Australian banks are regulated by the Australian Prudential Regulatory Authority (APRA). NBFIs are regulated by the Australian Securities and Investments Commission (ASIC).
There are different types of NBFIs. Their policies are designed to meet the ASIC’s federal regulations as well as their own operational needs. Non-bank policies usually differ from banks’ policies. Both use similar criteria to evaluate the validity of extending credit. These criteria include past credit history, size and number of businesses owned, and the nature of business. However, the willingness of NBFIs to extend credit in a given situation can be very different from that of a bank. There are also key differences in their processes. For example non-banks have an incentive to retain and/or gain more clients. They may be more willing to overlook an applicant’ rough credit history when discussing a loan. As smaller entities they are more willing to negotiate, given they can remain within their regulatory boundaries.
Some statistics
Notable NBFIs in Australia include the Pacific Mortgage Group, Clock Loans, Virgin Money, and Pepper. The following figures give an estimate of typical loan sizes and frequency. Virgin Money offers loans of AUD 1,500-63,000. Pacific Mortgage Group offers homeowners loans with monthly payments of AUD 500-600. Firstmac is a leading NBFI with more than 100,000 clients.
The APRA provided some interesting statistics in September 2020. Since April, loans given by conventional financial institutions to regular businesses declined. This expanded the market space for NBFIs.
How to choose
The ideal NBFIs to approach for loans are the ones with great track records. Consumer review website Trustpilot can be a good starting point for this research. Another idea is to look for lenders who have given loans to similar businesses. Some NBFIs specialize in lending to certain industries and sectors. This expertise makes them perfectly equipped to offer advice as well. The advice and personalization is often as valuable as the loan, if not more so. Banks can rarely offer such personalized attention on these small scales. However, keep in mind that as organizations NBFIs are also affected by external factors and market forces such as competition.
