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Small business access to finance: The evolving lending market

Australia’s 2.4 million small and medium enterprises (SMEs) make a major economic contribution. Outside of the finance, insurance, and public services sectors, SMEs employ about two-thirds of workers and generate more than half of Australia’s value-added. It is therefore important for the performance of the Australian economy that SMEs can readily obtain finance to support their day-to-day operations and fund their growth.

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Australian SMEs prefer debt finance: they are three times more likely to apply for debt than equity finance. Every year, about one in six SMEs applies for finance. Most SMEs seeking debt finance apply, successfully, to the Australian banks. More than 90 percent of the outstanding debt owed by SMEs is held by banks.

However, there is a persistent view that banks prefer secured lending to less-risky borrowers — home buyers and larger businesses — and have little appetite for unsecured lending to SMEs. Surveys report that almost one in five SME owners state that a lack of finance hampers their business. These responses suggest that credit constraints on SMEs may be a significant drag on the Australian economy.

While some SME owners worry about their access to finance, a surge of new lenders and products into the market appears to be rapidly changing the options for SMEs. Some of these options rely on emerging technologies that help lenders quickly assess the creditworthiness of SMEs. Combining new data sources with innovative analytical tools (such as artificial intelligence and machine learning) has given many lenders the information and confidence to lend to SMEs without the security of property. In other cases, lenders have taken a more traditional relationship-banking approach, providing tailored services that were once the hallmark of the banks.

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