THE loan products available to small and medium sized businesses (SMEs) have changed substantially over the past few years.
Notable changes include the shift away from small overdrafts, the growing popularity of residentially secured term loans and the increased availability of products that traditionally were the preserve of large companies.
“Residentially secured business loans have come of age over the past four or five years,” said Barry Hurst, the State manager of finance originator Lawfund Australia.
“You are basically getting the home loan rate on a business loan.”
Mr Hurst said SMEs were also able to negotiate loans with longer terms, in the order of 15 to 20 years.
While residentially secured term loans are widely promoted by the banks, they are less reluctant about publicising their residentially secured overdrafts.
Mr Hurst said these products could be 2 per cent to 3 per cent cheaper than a traditional business overdraft.
The increased use of business credit cards is another major shift over the past few years.
“The small overdraft is a thing of the past. Unless you need about $20,000 or more, the banks will put you into a credit card product,” he said.
Mr Hurst said small overdrafts were not economical for the banks, and therefore they were priced so they were not effective for business customers.
The banks were also reluctant to provide leasing and hire purchase facilities for less than $20,000.
The result was “a bit of a hole” at the bottom end of the market, which in some cases resulted in SMEs using inappropriate and expensive products.
“If the credit cards are used as they are meant to be, as a line of credit that is paid off each month, they can be effective,” Mr Hurst said
“But many people are using credit cards to buy equipment to set up a business. They are often unable to pay off the card debt and end up paying 14 or 15 per cent.
“In those cases, they should be using another product such as a term loan.”
Mr Hurst said there was now a greater willingness by banks to offer more diverse products to SMEs.
For instance, commercial bills – which are finely priced and offer a high degree of flexibility – are traditionally only for large commercial or corporate customers that need to borrow $250,000 or more.
Now they are available to businesses borrowing as little as $50,000.
Another product that is more readily available is the multi-option facility. These facilities combine several products, such as an overdraft, commercial bills and a fixed rate loan, under a global credit limit.
“Five years ago they were for the big end of town, but they have become more widely used,” Mr Hurst said.
Lawfund, which claims to be Australia’s fifth biggest loan originator, has been operating in WA for two years.
Unlike originators that deal directly with consumers, Lawfund’s members are solicitors, accountants, real estate agents and other professional advisers.
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