When it comes to getting a loan, Australians have lots of other options other than big four banks. Nonbank lenders or peer to peer lenders provide an option for businesses to get the money they need fast without having to endure the rigmarole of getting a loan through a bank.
According to Insolve Panel member David Levi, non-bank lending is ideal for businesses in the early stage of development if they need working capital to fund their sales. For example, if you can get stock to sell at a good price now, but don’t have the money to cover it, you might consider getting a loan. This allows you to secure the stock, turn it around and make a profit which you will then use to pay back the loan.
David Levi says, “I am delighted that there are new non-bank start-ups. Marketlend is an example of a nonbank lender, providing great opportunity and flexibility to lend funds to businesses, and taking advantage of a digital platform. This service is supported by real and experienced people to assist small businesses.”
So we know that non-bank lenders can be good for when business is going well – but what about when it’s not? Is it a good idea to involve a non-bank lender when you are trying to avoid business failure.
Consider the risks.
Non-bank lenders can be much more flexible, and nimble than a bank and can provide a great service. Usually Non-Bank lenders well understand the risks of ‘distressed lending’, where they are loaning money to a business that is having trouble. That said just because you can borrow money doesn’t necessarily mean you should!
Are you using the money to plug a hole or cover your losses? What are your chances of paying the creditor back? Is it possible you are digging yourself into an even deeper hole?
These are the questions a business owner should be discussing with their accountant before they take out a loan with a non-bank lender.
If you are using the money to plug a hole in your business, getting a loan from any creditor, bank or non-bank, is not a long-term solution. A more practical course of action might be to look at a business restructure, especially if the potential lender is charging a high-interest rate. If you have already been through a bank and they weren’t able to give you a loan or extension it may be worth considering why this was.
Consider why you need the money in the first place.
If you are looking to get some short-term credit from any kind of lender you need to consider why. For example, if the money is to cover something like rent or wages, this could be a sign of a bigger problem within your business.
To demonstrate this point, Insolve panel member, Ginette Muller gave this example. “If I borrow to buy stock with a 20% interest loan then that is going to destroy my margin and maybe even result in a net sum loss. As a strategy this would require careful consideration and would be suicide for a lot of businesses.”
Another problem that your business might be facing is weak demand and high competition, a common issue across many industries today.
According to Ginette due to fierce competition, businesses often struggle to put up prices believing they can absorb the losses until “things get better”. There is only so much any business can handle in a loss making scenario before Directors are called upon to plug the hole. Borrowing the money with a personal guarantee or a second mortgage is as good as the Director funding the losses with equity from the family home. “That’s fine,” says Ginette, “just be aware of what is really at risk and talk to your spouse so they know as well”.
So what should I do?
It is worth reiterating that overall non-bank lenders can be a great option for businesses and individuals. They are flexible, fast and provide a great service. They can be a great alternative to the traditional places for finance – as long as you are taking the time to think carefully about why you need a loan in the first place, Ginette says ask yourself “Will this money actually fix a problem or simply create more problems in the long run?”
David Levi supports Ginette’s perspective. He adds “If you know your business and your industry, and you know you can bring in stock and sell it, and you need the funding, then non-bank lending is fairly easy to access. The smart operators will use it well and make greater profits. If uncontrollable events occur (for example, events impacted by the US-China trade war), then the smart operators will also seek out help.
As David demonstrates there are circumstances in which it is perfectly reasonable to take out a loan for reasons that sustain the business. However, he also says if there is no realistic chance of improvement you will want to look at a bigger solution that isn’t taking out another loan. “Isn’t that a definition of futility, you keep on doing the same thing and expect something different to happen each time?”
Before you make any decisions about the future of your business first consult with a qualified professional. If you are concerned about possible insolvency, an experienced Insolve panel member can help you explore your options.