To borrow or not to borrow?

There is no doubt that we have all faced unique and significant challenges in 2020 and 2021. The initial concerns that were held for business solvency and the follow-on impact on unemployment saw Government/s, Government agencies, regulators and many lenders take immediate steps to support business borrowers. This was unprecedented. In the main, business owners responded brilliantly, with the spectre of potentially harsh action by lenders removed, they focused on rapidly ‘pivoting’ their business model to suit the prevailing market conditions and accelerated the use of technology and social media platforms to interact with existing customers and attract new customers.

Whilst lenders tightened their assessment criteria for new lending initially, by the first quarter of 2021, most had reverted to “pre-COVID” policies. This position has been maintained throughout 2021. As evidenced in the following chart, after the initial “shock” in the June quarter of 2020, business lending commitments have been trending up, with lending for property & construction growing strongly.

Interest rates have been on a general downward trend since the “Global Financial Crisis”, a time when lenders reacted in a less supportive manner. Since that crisis, we have seen an enquiry into small business lending and the Bank Royal Commission. The outcomes of these enquiries have damaged the reputation of the Banks and undermined the trust of many customers. Additionally, the implementation of recommendations and greater oversight by banking regulators has seen tightening credit policies across the industry. These changes have provided the opportunity for a significant increase in participants in the Australian lending market. New lenders such as Neo-Banks, specialist financiers, Credit Funds and Private Lenders as well as some traditional equity investors; Private Equity Funds, Hedge Funds and Institutional Superannuation have entered, resulting in the greatest number of competitive lender options ever experienced in Australia.

Many non-bank lenders choose to focus on a specific market segment, certain industries, or a lending product type and because of this, have a deep understanding of relative risk and opportunities and can provide timely and relevant structures, reporting requirements and covenants. They are also less reliant on property security when lending to businesses with demonstrated cash flow.

There are also a growing number of lenders that are focusing on supporting growth businesses with structures that may include ‘hybrid’ debt/equity solutions, allowing the lender to participate in some “upside” of the growth to support a more ‘aggressive’ lending position.

So, the questions for business owners and executives are:

• With an incredibly competitive lender landscape and record low interest rates, is it time to explore your borrowing potential?
• How do you ensure that your existing lender is giving you the best deal available? If they are not, how do you navigate the myriad of lenders, compare lenders rates, fees, and terms & conditions to ensure that you do get the best deal & structure, without a dedicated adviser?

At PKF, we focus on working with clients to save them time and money and to ensure that they have the best capital solution to support their business strategy. We have dedicated specialists available to assist with all your debt and equity requirements.