Nine million Australians want to start a business, but 60% of those potential business owners state that lack of funding is the biggest obstacle to becoming their own boss.

It’s not just new business owners that struggle to secure financing. Due to the strict lending criteria required by banks, many businesses are unable to get finance from traditional sources and are left looking for alternatives.

While bank loans and credit cards are well-established funding sources, non-traditional finance has become an increasingly more widely used way for businesses to access the funding they need.

Despite the sharp increase in non-bank business lending, Australia still lags behind its international peers when it comes to the use of alternative business finance. The average business owner is still relatively unfamiliar with non-bank lending.

Who Are Non-Bank Lenders?

Alternative lenders offer a range of financial products to help businesses. Unlike a traditional lender, non-bank lenders do not hold a full banking license. They provide competition to banks, offering more flexible and accessible funding solutions. Non-bank lending covers a range of financial institutions and service providers, including:

Insurance Companies
Insurance companies offer protection to businesses in the event of damage, theft, and other events that could damage business property or financials. They are considered a non-bank lender as they do not hold customer deposits, provide a financial product, and charge businesses a monthly repayment premium.

Most businesses use insurance products to cover short and medium-term risks to business property, vehicles, stock, and other assets.

If you are looking to raise capital for your business, you may seek out a non-bank investor. In exchange for lending money to the business, the investor will either charge interest and expect regular repayments on the debt or buy equity in the company.

This form of non-bank lending is a broad category that can include family and friends, hedge funds, investment advisors, and peer-to-peer lenders.

Non-Bank Lenders
Non-bank lenders provide direct funding to businesses through a range of financial products. Solutions can include debtor finance, Equipment Finance, and merchant cash advances, among others.

Australian non-bank lenders are not required to meet the strict lending criteria of banks. They can be much more flexible with whom they can lend to and how quickly they can provide funding. With traditional lenders increasingly risk-averse and unwilling to lend to small businesses, non-bank funding solutions have seen a significant increase in usage over the last 10 years.

E-Commerce Lenders
E-commerce lenders have grown with the global boom in online sales. Many e-commerce businesses are reliant on third-party companies to sell products and accept payment from customers.

Payment processing companies like PayPal provide funding based on the number of payments an e-commerce business receives. Companies can obtain financing with repayments automatically deducted at the point of sale when PayPal processes a customer payment.

E-commerce giant Amazon also provides funding to businesses that have stock held in Amazon warehouses. The stock acts as collateral for funding, with Amazon deducting repayments from the seller’s account every two weeks.

Are Non-Bank Lenders Safe?

Lending from a non-bank lender is just as safe as getting a loan from a traditional bank. Because non-bank lenders are not as well-known and do not have a banking license, many business owners mistakenly see non-bank lending as less secure.

There’s a misconception that non-bank financial products are riskier than traditional bank loans and credit cards.

A non-bank lender cannot take a deposit, and the financial products do not involve your existing business funds being transferred to the lender. The only transaction to the lender is the repayment of the money you have received as an advance plus any interest and fees.

While non-bank lenders are not subject to the same licensing and regulation as traditional banks, they still have to follow Australian laws. They are regulated by the Australian Securities and Investment Commission (ASIC).

What Are Some Risks Tied to Using a Non-Bank Lender?

Using a non-bank lender involves the same risks associated with getting a loan from a traditional bank. It’s just as important to make sure that you understand the terms, conditions, and rates involved with the funding.

As with any form of business financing, you should be cautious about taking on debt and only borrow what you need and can afford to repay. Take time to understand any one-off and ongoing fees involved, and be aware of the interest rates when deciding on a financial product.

Unlike traditional funding solutions, non-bank financial products are often considered off-balance sheet forms of financing. They do not impact your ability to secure funding from other sources, and applications generally do not affect your credit score.

However, you should make sure you meet the criteria set out by lenders to avoid any unnecessary loan rejections that could negatively impact your credit score.

What Are the Most Common Products Offered by Non-Bank Lenders?

Non-bank lenders like ScotPac offer a range of different financial products. These innovative solutions provide more funding options to businesses. Because non-bank lenders aren’t subject to strict bank lending criteria, they can provide flexible funding solutions tailored to your business’s needs.

Invoice Finance

Invoice Finance is a non-bank financing solution that allows a business to use its account receivables to access immediate funding. You can release up to 95% of the capital tied up in your outstanding invoices in the form of a cash advance. When your customer pays the invoice in full, you receive the remaining balance of the invoice less fees.

There is no property security required, and funding limits increase in line with sales. The more sales a business makes, the more funding it can access through Invoice Finance.

Invoice Finance solutions typically fall into two categories; invoice factoring and invoice discounting. The main difference between the solutions is confidentiality and the responsibility for the collection of the invoice. With invoice factoring, the non-bank lender is responsible for collections and deals directly with the customer.

Read our guide What is Invoice Finance? to find out more about both Invoice Finance solutions.

Trade Finance

Trade Finance is a non-bank form of financing that helps importers, exporters, and businesses that sell to other businesses. The financing solution allows a company to release capital tied up in the supply chain and fund the purchase of new stock and raw materials.

It’s an effective solution for businesses that suffer from cash-flow gaps due to extended payment terms offered to customers. A funding facility can act as a revolving line of credit that can be used to pay both domestic and international suppliers.

Trade Finance facilities can also involve Letters of Credit and Documents Against Payment to help mitigate the risk involved with international trade. When combined with an Invoice Finance facility, a Trade Finance solution can provide funding to cover up a cash flow gap of up to 180 days.

Take a look at our guide How Trade Finance Works to find out more about the solution and whether it’s a good fit for your business.

Asset Finance
If a business needs to upgrade, replace, or buy new equipment or machinery, an Asset Finance solution can effectively spread the cost and improve cash flow management.

Many businesses need expensive equipment to expand and compete. A solution like Equipment Finance can provide funding so the company can get the equipment it needs without disrupting cash flow and tying up capital in high-value assets.

Finance solutions allow you to spread the cost of equipment, machinery, and vehicles over a more extended period. Terms range from 24 to 60 months.

Asset Finance can also be used to help businesses release capital tied up in the assets they already own. If you could use an injection of working capital to fund expansion or capitalise on an opportunity, you can use your existing assets as collateral to access a line of credit.

Read our guide How Asset Finance Works to see how a funding solution can help your business.

Non-Bank Business Funding with ScotPac

Even if you’ve been rejected for a traditional business loan, there’s a good chance you will still qualify for a non-bank funding solution. There are plenty of alternative funding options to help your business get the funding it needs to grow.

To find out more about non-bank business lending, contact our team of friendly business finance advisors today. We’ll walk you through your options and create a tailored solution to your business’s unique needs.