When an Australian small business needs a loan, what would you guess are the biggest obstacles? If you said getting approved, you’re not far off. But a recent survey shows there’s a bigger hurdle, one that stops many small business owners in their tracks: it’s the complexity of preparing a loan application.
Forty-two percent of small business borrowers said providing financial paperwork was the greatest difficulty, according to a CoreData survey of 500 businesses, both Xero and non-Xero users. Just 405 said finding a willing lender was the top challenge. And over 80% of all businesses agreed the documentation process was onerous.
Anyone who has applied for a loan or a mortgage can probably relate. There can be weeks of back and forth by email and phone. Signatures must be notarised and bank statements have to be gathered. And that’s just the application process. The actual lending decision can take weeks more, and a “yes” is never guaranteed.
While it’s hard to put a dollar value on the stress of applying for a loan, an arduous process has real costs when you need money to seize an unexpected business opportunity or fill a gap in cash flow. Poor access to capital is the greatest threat to long-term growth aspirations, according to one in five businesses surveyed. And tapping into personal funds for business growth, as many owners do, can weaken their financial safety net.
The large majority (71%) of small business owners surveyed said they would find it at least somewhat appealing to apply for funding if there was a digital process to facilitate it and create the documentation on their behalf.
What’s not widely known is that such technology exists in the market.
For example, small businesses can choose to share their up-to-date Xero financial reports with both big banks and smaller alternative lenders today. The transfer of data is managed securely using application programming interface (API) technology and only with the consent of the small business.
Many small businesses also seek continuous certification of the data by their accountant, providing the lender with clear visibility of the current state of their business. Through that process, a business can obtain an almost instant decision on unsecured loans of up to $250,000 with very little time and no paperwork.
Help from an accountant is an important step, says the Australian Small Business and Family Enterprise Ombudsman.
“Small and medium enterprises need to work with their bookkeepers, accountants and trusted advisers to prepare the business for lending,” according to a May report from the Ombudsman.
Obtaining a loan depends on “businesses demonstrating their creditworthiness – having current business plans, cash flow forecast, demonstrable profitability, and a track record of paying bills on time.”
Better data helps not only the borrower but the lender. When lenders have a fuller picture of a small business, they can make more informed credit decisions and manage their risk more efficiently, which nurtures responsible lending. Lower risk ultimately leads to quicker lending decisions and, potentially, better rates over time.
If funding was available, just how much would business owners borrow? The CoreData survey found they would consider borrowing an average $85,562 each in the next year and $159,641 over the next five years. When you multiply those dollar amounts across the 2.2 million small businesses in Australia, it’s clear there’s an enormous, unmet need for capital.
Here’s how business owners would spend the money:
• Marketing (61%)
• Equipment (46%)
• Hiring more staff (31%)
• Systems and processes (30%)
• Materials (25%)
If we’re going to create more jobs and growth in Australia, we need small businesses – the engine room of the economy – to thrive through better access to capital.
Some 84% of surveyed businesses said they would value access to more lenders. While Xero is already connected to 180 financial institutions globally, that number is about to grow. We’re seeing new integrations from alternative and traditional lenders in Singapore, the UK, the USA, and here in Australia.
As we look ahead, it’s clear that a connection to an accountant or bookkeeper, combined with the best cloud technology, will be key requirements for access to the capital businesses need to survive and thrive.
* Ian Boyd is Financial Industry Director of Xero Australia
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