Emerging World of SME Lending
Westpac has joined others in its market with expansion of commercial lending policy for the SME sector. They are extending out allowable loan terms and allowing more leverage for certain commercial borrowings.
This follows a raft of activity, also stimulated by the Government Guarantee Scheme, where several lenders have extend their credit policy aggressively for SME's.
Background
This originally showed itself for borrowings up to $1M. Where much like simplified processes for Asset Finance, lenders sought to make both their offering more competitive and their internal processes more efficient. The changes included:
- Extended Loan to Value Ratios (LVR's);
- Simplified Income Verification Processes;
- Extended Loan Repayment Terms; and
- Ability to extend out Loan Terms even where lending is not fully secured.
With the success of these programs, and with competition intensifying, many lenders are pushing these credit parameters out to borrowings of up to $3M.
Traditionally, the loan term and the repayment type offered, depended on a number of factors. Along with the collateral offered, there was a strong focus on the purpose for which the funds were utilised.
Lending to the SME sector without tangible security was challenging and time consuming for lenders. According to APRA data, around 50% of the $420 billion of total outstanding lending to SMEs is secured by residential property.
This is not surprising and is partly attributable to the strength of Australian house prices, which enables business owners to borrow more against the value of their property. Moreover, using a home as security for a business loan enabled borrowers to access “better” terms.
The following table is a very simplified overview of key lending parameters available, based on different types of security provided:
Changing Landscape
Lending products have been increasingly available to accommodate for different availability of collateral, income verification and repayment capability.
In terms of interest rates and terms, whilst outcomes are also driven by the risk and capital requirements imposed by banking regulators; they are responding to the Government's push for additional credit availability for SME's. There has also been a general push to reduce the reliance on residential property (often the family home) as collateral.
For example, Westpac's new policy allows an LVR of 80% against non-specialised commercial property or 100% of the value of residential property to $3M. This is supported with loan terms of 25 years for commercial property, and 30 years for residential property.
So the landscape looks more like this, again on a simplified basis which ignores some industry specific policies.
As the cost of funds fall, and niche lenders become more established, the profile of commercial lending options are changing. For example, unsecured lending is still the most expensive, but interest rates have fallen significantly. Especially as new lenders find their rhythm in relation to loss ratios and returns, as they chase more market share and better credit risks.
Broadly, competition is intensifying as lenders chase market share for active trading businesses, where there is a "first way out" rather than relying on the continued strength of the collateral provided.
So the test of success will be seen in the coming years, along with the technology and innovation in lending that will respond to risk and opportunity in equal measure.
More Information?
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