Non-bank lending on the rise, as heightened interest rates squeeze small business

Small business demand for non-bank lending solutions has risen 50% over the last year, business lender ScotPac says, suggesting the time and effort required to obtain traditional financing, along with rising interest rates, are causing entrepreneurs to look further afield.

ScotPac’s latest SME Growth Index report, drawing insights from 720 Australian SMEs, found non-bank borrowing demand in the first quarter of 2023 was triple that recorded in September 2018, and is at the highest level since the bi-annual report began in September 2014.

The findings match ScotPac’s own business data, CEO Jon Sutton said.

“The significant growth in these non-bank lending figures are consistent with large increases in ScotPac’s client numbers and total lending over the past five years,” Sutton said in a statement.

Survey participants said the time and effort required to meet business lending requirements, and the security checks that come with those agreements, are the main barriers between them and accessing finance.

Some 28% mentioned strict bank lending criteria as the biggest factor.

That finding aligns with skyrocketing interest rates, which have made it costlier for businesses to take on traditional bank financing and harder for applicants to meet safe lending criteria.

Reflecting the difficulty of struggling SMEs to access traditional financing, ScotPac states nine out of ten small businesses in that category are now more likely to seek a non-bank lender than a mainstream financial institution.

The reported uptick in non-bank lending interest comes two and a half years after the Productivity Commission forecast a growing role for non-traditional lenders in the SME space.

That includes lenders who provide financing without property put up as collateral, the Productivity Commission said.

Here, too, the ScotPac data suggests the property barrier may be encouraging entrepreneurs to seek non-bank lending: some 16% of respondents said they sought non-bank lending to avoid putting up property as collateral.