An inability for small businesses to gain loans from banks has given rise to merchant lending: a product with no fixed term credit that can be paid off daily through the business’s EFTPOS terminal meaning improved cash flows for business owners. An inability for small businesses to gain loans from banks has given rise to merchant lending: a product with no fixed term credit that can be paid off daily through the business’s EFTPOS terminal meaning improved cash flows for business owners. An analysis of the Australian Prudential Regulatory Authority’s (APRA) lending data reveals the total amount of business loans owed to Australian banks at $570 billion is only marginally above the amount owing on investment property at $537 billion. Simply put, lending to the more productive yet riskier parts of the economy has given way to the loan love-affair associated with property investment.
Merchant cash advances, a form of lending popular in North America, is starting to gain traction in Australia as an alternative to the cash flow sapping effects of a double-digit loan from a bank or traditional finance provider. Brisbane-based small business financer Beyond Merchant Capital, who partners with US giant First-Data, is one such group pioneering the US model of managing turnover to achieve greater cash flow for Australian small to medium-sized firms. Repayments under a merchant loan are made by applying a small percentage of a business’s daily turnover with no fixed term, with the lender assuming the risk associated with the enterprise while the lending arrangement itself observes no fixed term and no interest rate. Interestingly under a merchant arrangement, the business enters into one credit relationship and cannot source further unsecured finance; a practice called “loan stacking” that has flourished in poorly regulated environments and through the proliferation of on online lenders.
Despite the arrival of prominent fintech providers such as Prospa and Sail, the effective interest rates charged by many of the new fintech entrants are well above 10 per cent and are still very much like a traditional loan. Arguably the one-size-fits-all approach to lending does not work for small businesses and a more nuanced solution that encourages small- to medium-sized enterprises to confidently talk about credit without being treated with suspicion is a starting point.
Small businesses often face the choice of an onerous equipment lease proposition or a gruelling margin-destroying business loan that only exacerbates failure rates among private enterprises across Australia. Innovation is the key to growing any business and, for those wanting to “flip the script” on the unsuccessful traditional model of bank loans, the option that presents at the EFTPOS terminal could be a lucrative one.
Author: Dan Petrie – Dan Petrie is the head of media and industry at the Chamber of Commerce and Industry Queensland
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View the Queensland Business News online version
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