Based on Australian Bureau of Statistics’ findings, 99.5% of the establishments in Australia are SMEs. Most of these small businesses have financial issues and will often seek for ways to get funding. Having sufficient funding is an instrumental preparation that businesses have to scrutinize as it helps them in meeting their objectives. Thus, this has caused a steady growth in alternative finance in Australia.

Traditional finance is the main source of financing for Australian businesses compared to the alternative finance products.   Here are some types of financing products available in Australia, both traditional and alternative finance product.

 

Traditional Finance

 

Business Term loans

Business loans can be advantageous for companies that are looking for a large injection of funds. It is often used to pay for a major investment (i.e. equipment, assets, expansion) in the business or an acquisition.   The loan often have fixed interest rate, with monthly, quarterly or yearly repayment plan.  As this is classified as an unsecured lending, prices are usually higher.

 

Asset-Based Lending

Asset-Based lending, which is also known as commercial finance or asset-based financing, is a business loan acquired through assets as collateral. Collateral that is included in this financing method refers to assets such as Balance-sheet assets, accounts receivables, inventory, etc. Financiers usually provide the loan based on the value of the company’s asset. This method of financing usually occurs when a company is unable to pay the loan through its cash flow.

Assets that are highly liquid are more preferable to the financiers in case the borrower goes default. Assets that are more liquid also have a higher value since the loan provided are always lesser than value of the assets.

 

Overdraft

Overdraft is an additional credit provided by financial institutions when companies have used up all the funds in their bank account. This will allow businesses to continue withdrawing/transferring funds even though the account has insufficient funds for the transactions.This means that banks authorise companies to borrow a limited amount of funds instead of rejecting or bouncing the payments.

The repayment for an overdraft is similar to other loans, with interest but it is usually lower than those in credit cards. This will allow the company’s ability to pay to remain positive as it will always approve their cheque payments.

This finance facility should be used carefully as the fee can be relatively high.

 

Alternative Finance in Australia

Alternative Financing is a new type of financing facility offered by non traditional financiers to both consumers and businesses.  It usually utilise technology heavily to facilitate the end-to-end processes from on-boarding to funding and settlement.  These alternative financing platforms usually use an innovative way to asses the borrower’s credit worthiness, allowing businesses to acquire funding they did not have access to previously.

 

Invoice Trading / Invoice Financing

Invoice trading is an alternative financing method that has been gaining steam due to its low fees and speed of funding.  It is a form of accounts receivable financing or invoice financing.  In this method, the seller or SMEs can receive funding by selling outstanding invoices to a network of investors.  The platform such as Invoiceinterchange helps support SMEs cash flow through a state of art technology which allows SMEs to sell off their outstanding invoices with a few click of a button.  SMEs will receive funding within 24 hours. Investors will receive the principle with interest once the end customer pays the invoice.

This method is very effective way to obtain finance, especially for businesses who are experiencing long term payment enforced by their customer as it eliminates the waiting time for SMEs to receive their payments.  Hence, SMEs can then further expand or reinvest in their business to boost their growth.

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Peer-to-Peer (P2P) Lending

P2P Lending is a form of debt financing which enables both individuals and businesses to borrow money without the use of a traditional financial institution as an intermediary.  It is another available product type of Alternative Finance in Australia.  P2P lending offers a more efficient way of obtaining funds and an attractive rates than the general brick-and-mortar lending scenarios.  It allows the borrowers to receive their funds quickly without tedious application and paperwork. Each loan may be funded by one or more investors/lenders.  All processes are carried out using technology.

In Australia, P2P lending sector has grown over 250% since 2015 according to KPMG Australia. Its popularity has been steadily increasing since 2012 due to its simplicity and speed offered on the platform.

 

Selecting The Right Financing Product

These are the some of the common types of financing available for businesses in Australia. Each type of financing has their own advantages and can be very effective depending on the type of business that the borrowers are engaged in.  Alternative finance in Australia may provide the flexibility and speed that your business needs.

Talk to us today if you need help selecting the right financing product for your business needs.

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References

Australian Bureau of Statistics, 8165.0 – Counts of Australian Businesses, including Entries and Exits, Jun 2013 to Jun 2017, link

KPMG Australia, Cultivating Growth: The 2nd Asia Pacific Alternative Finance Industry Report, 20 Sep 2017, link

 

 

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What is Invoice Trading / Invoice Financing