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How bank conservatism is forcing companies towards alternative lending sources

April 20, 2018 / NEWS

How bank conservatism is forcing companies towards alternative lending sources

The conservative lending practices of banks following the financial crisis is forcing some sectors to seek alternative lending sources to finance their business models. The practice is particularly acute in the construction industry which has seen strong demand for credit over the past 18 months but very weak supply from traditional lenders.

Oversupply in some metropolitan areas is to blame

Banks cite the oversupply of properties in Brisbane and Melbourne as key reasons for holding back on lending to the sector. House prices in Brisbane, one of the worst affected areas, continued to fall in the first quarter, down by around 5%, with units on the South Side and Western suburbs being the most affected.

Companies turning to non-bank business loans

With companies in the construction sector struggling to raise funding via traditional methods, they are turning to non-bank business loan providers to see them through. Non-bank lenders take on the role of syndicated lenders, pooling the resources of a small number of high-net-worth individuals to provide short-term asset finance for projects of all kinds.

Typically, non-bank lenders charge higher interest rates than traditional banks but offer a faster settlement and more amenable terms. Such loans often run from six to 12 months and don’t require monthly repayments, with the lender making money from upfront fees instead. This can help ease the cash-flow of many construction companies who are being forced to refinance apartment blocks which are left unsold.

Non-bank lending could become the norm as tighter controls are forced on traditional lenders

With many analysts fearing that traditional lenders will face even tighter controls following the release of the Royal Commission report into financial services, due in September 2018. There is the potential that the availability of loans to more sectors, such as retail and hospitality could be affected, opening the door for non-bank lenders to fill the funding gap.

Far from being a bad thing, this has the potential to make the Australian finance industry more efficient because more diverse funding choices mean businesses have an increased choice of suppliers, which should lead to greater resilience in the financial system and lower prices for customers.

A good example of how the Australian economy could benefit would be to look at the US model where there is a much wider range of traditional and non-traditional finance available for companies to choose from, leading to a more diverse and efficient market.

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