Opinion

What the Alt Fi sector can learn from banks

3 min read

15 October 2014

As we wait to hear how the Government is going to implement mandatory referral of businesses turned down by banks to alternative funders, Paul Mildenstein, CEO of revenue based funder Liberis, gives his views on some of the lessons the alternative finance market should take from the banking sector.

The small business funding landscape has shifted seismically, with the rapid growth of alternative finance estimated to be over 250 per cent in the last 12 months. 

Alternative lenders have emerged as credible and increasingly recognised routes for business funding – moving from the fringes to sit centre stage with traditional lenders. 

But as the sector grows and matures, as with any sector, there’s a danger that it will morph into a younger model of the old lending guard.  

It’s critical that it stays true to its founding values and maintains its SME culture and value exchange, such as convenience, integrity, flexibility and speed of service, that have made alternative finance models such an appealing alternative to traditional bank lending.  

Keep it simple

It’s important that players keep products and processes simple, clear and transparent.  The business owner should always be able to understand what they’re signing up for and not have to jump through hoops to get an answer. 

Access for all

Ensure that business owners aren’t disadvantaged in accessing money through gender, ethnicity or simply an inability to put together a well constructed business plan. And funding applications should be free of charges.

Agnostic

Avoid bundling at all costs. Access to funding should not have to be as a consequence of taking other products and services and becoming beholden to that provider. The sector should maintain ‘conscious uncoupling’ and offer products without any ties.

Modern underwriting 

Don’t do what the banks do but just more quickly. How relevant is a businesses’ accounts from three years ago? Not very; it doesn’t reflect the business today or tomorrow. 

Modern underwriting must combine technology with innovative credit scoring and information models utilising Big Data to vet potential customers. 

Assessing a businesses’ industry reputation, customer reviews, ratings and social media footprint can provide a more truthful picture of its risk. 

Education

The sector should work together to help businesses understand the type of funding they need and not what the provider wants to sell. Collaborative platforms such as the alternative business funding portal, which uses a traffic light interface to signpost businesses to relevant funding sources appropriate to their business model, help provide impartial, fast and transparent access to funding.

Regulation 

The sector must get proper regulation and governance and it must be industry wide. It needs to demonstrate integrity and ethics; small business owners desperate for funding to survive or who have been turned down for a bank loan are vulnerable and there can be no room for unscrupulous lenders. Lenders should sign up to a code of practice that has a membership fee and eject anyone not conforming, as well as provide an ombudsman service.

Paul Mildenstein is the CEO of Liberis.

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