In Australia, small businesses are defined by a business operating with no more than 19 employees. Incredibly, there are over 2 million of these small business, which accounts for 97% of all Australian businesses. Furthermore, around 45% of private sector workers are employed by a small business with fewer than 20 employees.

It comes as no surprise then, that the Australian government is profoundly well informed on how important SMEs are to the economy as a whole. When almost half of the country's employees are being paid by an SME, suddenly SME tax incentives, grants and loans are very useful tactics to drive the economy from the bottom up.

There is an economic downturn in Australia that is having negative implications on SMEs. They're not struggling to the extent as the UK right now, but nevertheless it has left them hungry for cash.

With cashflow being at the core of SME issues universally, they're in need of finance to fund growth projects and pay staff on time. The digitalised economy has harboured a very lucrative and frictionless market for online lenders, and they are right on the doorstep of SMEs, happy to fill their pockets as and when they ask for it.

Financing for SMEs

When an economic downturn is approaching, the worst bit is expectations. It’s not usually the actual unemployment or inflation that’s hurting, but that markets overreact because of fear mongering and low expectations. In fact, low consumer confidence can cause a lot of issues. The thought that there is a recession, can lead to an actual recession. Tightening up the purse strings can reduce demand in many markets, which can cause cash flow issues and failure to take on more staff or up their wages in line with inflation.

The story is similar in Australia with lending. Big banks are getting uptight and very slow at processing loan applications. The thought of lending cheaply and quickly is not appealing when businesses are expected to struggle. This is even worse for SMEs, who do not have a long enough track record to prove they can endure a downturn and make repayments.

The economic downturn itself is beginning to threaten cheap APR loans. So, either the banks only loan to very secure companies with low risk, or they raise they APR. The first is not good for SMEs, who struggle with their creditworthiness as it is, and the latter makes the banks obsolete - here’s why:

Alternative financing in Australia

If you’re going to get a slightly higher APR loan, why do it with a bank? They’re slow, they have high application standards that takes a long time, they reject a significant amount of these applications and they’re just a bit outdated in general. Instead, alternative financing companies are flourishing. This is what they’ve been offering all along, only banks’ low APR was still holding a lot of allure. Now that times are a bit tougher, SMEs are turning to them for cash - to which they’re happy to give them whatever they ask for, whenever they want it.

The requirements for these loans are very minimal. Many want only 6 months of trading history and £60,000 in turnover per year. This are very low standards to hand over a £50,000 loan two days after an application, which happens a lot.

Small business loans across the country are becoming increasingly popular, in particular because of the waiting times. Here is an idea of waiting times in response to applications from two of the most well-known lenders:

• Prospa - 1 to 2 day waiting time

• GET CAPITAL - 24-hour approval

Alternative financing has therefore become an urgent, immediate source of financing. There are a lot fewer hurdles to jump over in the application process. Drawing up business plans, cash flow forecasts and so on for banks is extremely time consuming and also costly if outsourced - this needs to be factored into the price of a bank loan. Alternative financers on the other hand require very little documentation, and are much more forgiving regarding credit rating and trading history.

Of course, it’s not magic - there are still some downsides to alternative financing. Even with increased APR from Australian bank loans, the APR from these alternative lenders will no doubt still be higher. There are still causes to use a bank, it’s just that not many SMEs fall under this umbrella. If you’re a long, established business with a healthy cash flow, then try a bank first as you may be lucky enough to be approved. However, the second condition is that you have plenty of time and that the loan is not urgent. It could take weeks, and even months, for an application to be processed by a bank - they are uber careful and particular.

Furthermore, if you fulfill these two requirements then it’s more likely you have assets that would be approved for collateral with a bank loan. A secured loan means you can put forward a significantly valuable assets (that is eligible), meaning the bank can repossess it if you fail to repay the loan. This isn’t always easy to find for SMEs - and it doesn’t sound all that appealing either. But it’s usually worth it if you can, as the APR will be much lower than an unsecured loan, because there is less risk involved. This is much more prevalent in traditional financing than in alternative financing, which is again a factor in which one you go for.

Whilst alternative financing used to be for those who could not receive a loan from a bank, they are becoming more than just a second choice. As potential tough times looms, businesses want to be sure to get a significant loan quickly with flexible repayment restructures - such as not having a penalty for early repayments, which is often the case with bank loans.