Loans Approvals are going up, but why are applications going down?
What is the biggest hurdle that owners face when they are trying to get their business up and running?
One word: Finance.
According to Xero’s State of Lending Report, one in five small business owners said that access to capital is the greatest pain point or perceived threat to their aspirations for long-term growth.
YouGov research commissioned by the Australian Banking Association (ABA)found that 60% of people wanting to start their own small businesses said that access to money was the biggest factor holding them back — higher than ‘life circumstances’ (42%) and a lack of experience (36%).
Why are Loan Applications decreasing when approval rates are rising?
According to Australian Banking Association CEO, Anna Bligh, banks currently have an application approval rate of 94% which, combined with the current low interest rate environment, means that now could be a great time for businesses to apply for a loan. While there is this high rate of approval, business loan applications through commercial banks have declined by a third since the 2014 Calendar Year.
According to Bligh, there could be many reasons for the downturn, including applicants believing that they won’t get a loan, thinking it takes too long, deeming the application process too complex or they’re simply borrowing money from other sources.
So who are these ‘other sources’ that small businesses are turning to?
Over the past five years, a number of challengers have entered the Australian business lending space, offering a competitive, online alternative to regular commercial banks.
According to GetCapital CEO, Jamie Osborn, lenders like GetCapital have been able to leverage technology and data to better serve the needs of small businesses, precipitating a shift away from banks.
“Small businesses want a fast and efficient application process, a credit decision based on the strength of their business rather than the size of their family home, and lending products that fit their specific requirements and a high level of service.”
And with banks’ business models revolving around mortgage underwriting, applying for loans at traditional banks is no longer an attractive option. This is as the credit underwriting process is centered around property security and assessment processes, which are long and arduous with lots of paperwork, and now seems less necessary.
So how can business loans be improved?
For one, less documentation. 80% of small business owners said the documentation required to apply for a business loan was onerous and of those that had applied with a lender, 42% said getting financials to a lender was difficult.
Many newer Fin-tech business lenders allow businesses to plug in their accounting software as part of the application, providing a smoother and more automated application process. Xero’s research supports the view that technology such as this is the way forward.
Finding better loans
If you are a small business owner looking for finance, Ian Boyd (Financial Industry Director at Xero Australia) suggests working closely with your accountant and bookkeeper to ensure your financials are in order. This will put you in the best possible position before starting your application.
“This will not only help you to understand the lending options available to you but also ensure you are keeping orderly books so as to boost your chances of loan approval.”