Credit Squeeze: Why Australian Businesses Are Turning to Alternative Capital

In Australia, SME loans account for about 50% of all total business credit. While this has been a fairly consistent figure for some time, it has become increasingly difficult for small businesses to access finance more recently.

According to a (Banjo Loans) survey last year, about 20% of all SMEs have experienced challenges when trying to do so recently. Primarily, this is due to higher interest rates, rising operating costs, stricter lending standards, and geopolitical uncertainty. 

Unfortunately, such circumstances have created a difficult environment for businesses that require funding to expand, purchase equipment or simply manage cash flow. However, while major banks remain an important source of financing, many business owners are discovering they are no longer the only option. Instead, a growing number are looking beyond traditional lenders and considering alternative sources of capital that can better suit their circumstances.

This is changing the way Australian businesses approach borrowing, as many are now exploring a wider range of funding solutions rather than relying on a single lender. In fact, ones that arguably better match their objectives, timelines and financial position.

Let’s explore why many Australian businesses are turning to alternative capital.

Why are Australian businesses finding it harder to borrow?

The lending environment has changed considerably since the present cycle of interest rate increases began in early May 2022. At that time, the RBA increased the official cash rate from the all-time low of 0.10% to 0.35%. Currently it sits at 4.35%.

As a result, banks have tightened their lending criteria amid higher borrowing costs, economic uncertainty, and changing market conditions. 

For thousands of businesses in Australia, this means they may no longer qualify for finance they would otherwise have obtained during the COVID-19 pandemic.

One of the main reasons why is that lenders often require applicants to present stronger financial records during the application process. They also want them to provide greater security and more detailed evidence that they can comfortably manage repayments. This can be challenging for businesses that are experiencing rapid growth, as they often need financing before higher revenues are fully reflected in their financial statements. Additionally, seasonal businesses can face difficulties due to fluctuating cash flow throughout the year.

What is alternative capital?

Alternative capital refers to finance provided outside the major banking sector. This could come from trusted commercial finance brokers such as Ardent Capital Group, private lenders and other non-bank funding providers. All of which offer finance across a range of industries and business types.

Essentially, rather than applying to one bank and accepting a single outcome, businesses can compare multiple lending solutions that may better suit their project or financial position. This savvy approach can be invaluable in situations when timing is important. Or when a business has funding requirements that fall outside standard bank policies.

Which businesses are feeling the credit squeeze the most?

Almost every industry has felt some impact from tighter lending conditions. However, some have experienced greater pressure than others.

One example is the construction industry, which continues to face rising material costs, labour shortages and project delays. These factors can place additional strain on working capital while projects are completed. Another is property developers, who often require substantial funding across different stages of a project. For the latter, changes in property values and lending policies have made funding more complex than in previous years.

Elsewhere, manufacturers regularly need to invest in expensive machinery and equipment to remain competitive. If they experience delays in accessing finance, it can slow down their production upgrades and business expansion.

As you can imagine, thousands of small and medium-sized businesses are also affected. Many rely on external finance to purchase stock, hire staff or invest in technology. So, if it becomes more difficult to access capital, their growth opportunities may need to be postponed. Likewise, exporters, importers, and businesses with seasonal income can experience periods of fluctuating cash flow. This can make having access to flexible funding arrangements very handy.

What types of alternative business finance are available?

It is worth noting that alternative capital is not a single financial product. Instead, it actually comprises a wide variety of funding solutions that meet different business needs. They include the following:

• Working capital finance: Can help your day-to-day operations by improving short-term cash flow during busy or quieter trading periods.
• Asset finance: Allows businesses to purchase vehicles, machinery or specialised equipment without paying the full purchase price upfront.
• Equipment finance: Commonly used when upgrading technology, manufacturing equipment or commercial machinery that directly improves business operations.
• Commercial property finance: Supports businesses who want to purchase offices, warehouses, retail premises or investment properties.
• Invoice finance: Enables businesses to unlock funds tied up in unpaid invoices. Rather than waiting for customers to settle their accounts.
• Trade finance: Assists businesses in purchasing stock or importing products by supporting payments throughout the supply chain.

As each funding option serves a different purpose, it is worth seeking professional advice to ensure you pick the right finance solution for your needs.

What are the benefits and risks of alternative capital?

Without doubt, alternative funding offers several advantages for businesses whose circumstances may not align with standard bank lending policies.

To start with, many non-bank lenders specialise in particular industries or project types. So, if your business operates within them, you have a better chance of being given approval based on an understanding of your industry.

Another huge benefit is that if your business needs access to capital quickly, the application process is often much faster with non-traditional lenders. They may also offer greater flexibility regarding their loan structures, repayment arrangements, and security requirements. (Although this will depend on your circumstances).

It is important to recognise that, like with any finance, there are potential drawbacks to accepting funding from non-bank lenders. For one, it is highly likely that interest rates, fees and lending conditions vary between providers. Additionally, some finance products may carry higher borrowing costs than comparable bank loans because they involve different levels of risk.

Before taking out a loan, it is essential to carefully review the terms. In particular, make sure you fully understand your repayment obligations, security requirements, exit costs and any other conditions before entering into an agreement.

It is also worth remembering that the right funding solution is not always the cheapest one. Instead, it is usually the one that best suits the business’s objectives, cash flow and long-term plans.