Bank vs non-bank business loans: what actually differs

"Should I go to the bank or a non-bank?" is one of the first questions an SME client asks. The answer depends on the deal, but the differences between the two are consistent enough to explain clearly. This article sets them out side by side. For the full background, see our guide to non-bank business lending in Australia.

The one structural difference

Banks take deposits. Non-bank lenders don't.

In Australia, any business that takes deposits from the public must be an authorised deposit-taking institution (ADI), supervised by APRA. Non-bank lenders fund their lending from warehouse facilities, securitisation, investors and their own capital instead. Almost every other difference flows from that.

Side by side

The table is a generalisation. Individual lenders on both sides break the pattern, and product guides are the final word.

Security

This is often the deciding factor. The RBA found that banks are reluctant to lend to small businesses without property security, and that entrepreneurs find it hard to borrow more than about $100,000 unsecured from a bank for trading needs (RBA, 2018).

Many non-bank products are built for exactly that gap. They lend unsecured, or take a general security agreement over business assets, or take a caveat or second mortgage rather than a first mortgage. If your client doesn't own property, or doesn't want to put the family home up, non-banks are often where the realistic options are.

Documents and speed

The RBA also noted that bank applications are often slow and document-heavy (RBA, 2018). Many non-bank lenders assess smaller loans mainly on recent bank statements and the business's cashflow, often with electronic bank statement access. That usually means a quicker decision.

Faster doesn't mean no checks. Non-banks still look at credit history, time in business, turnover, industry and existing debt. We cover those in How SME lenders assess a deal.

Price

Non-bank loans usually cost more. The RBA put this down partly to higher funding costs for online and marketplace lenders (RBA, 2018). The extra risk of unsecured, fast lending is also priced in.

When comparing costs, look beyond the headline rate. Establishment fees, ongoing fees, early repayment terms and how interest is calculated can change the true cost a lot, especially on short terms. Some short-term products quote a factor rate or a total repayment amount rather than an annual interest rate, so compare like with like.

Regulation

Both sides are regulated, in different ways.

• Banks are ADIs, subject to APRA's prudential rules.

• Non-bank lenders above $50 million in financing must register with APRA as registered financial corporations and report data. APRA can make lending rules for them if their lending threatens financial stability (Hall & Wilcox).

• For both, credit that is predominantly for business purposes is generally outside the National Credit Code. The ASIC Act's consumer protection and unconscionable conduct provisions can still apply (Brightlaw).

• Some non-banks also sign up to voluntary industry codes, such as AFIA's Online Small Business Lenders Code (AFIA).

When each tends to fit

These are general patterns, not rules.

A bank is often worth a look when the business is well established, has strong financials and property to offer, and the client can wait for a longer process in exchange for a lower price.

A non-bank is often worth a look when the client needs funds quickly, doesn't have or doesn't want to use property, has a shorter trading history, or has something in the file a bank's credit model won't accept, such as a recent ATO debt on a payment plan.

Many businesses use both: a bank for the long-term secured facility, and a non-bank line of credit or short-term loan for working capital.

How to explain it to a client

A simple way to put it:

"Banks are usually cheaper but want property and more paperwork, and take longer. Non-bank lenders cost more but can move faster, lend with less security and look at how your business is trading now. Let's see which of them actually fit your situation."

Then check the real policy. The hard limits, such as minimum time in business, minimum turnover, maximum loan size and restricted industries, are what rule lenders in or out. Visro checks a scenario against every lender on its panel and shows why each one fits or doesn't.

Sources

• RBA Bulletin, September 2018: Access to small business finance

• Hall & Wilcox: Non-ADI lenders, you may need to register with APRA

• Brightlaw: Business and investment loans, regulated or not?

• AFIA: Online Small Business Lenders Code

This article is general information only. It isn't legal, financial or credit advice and doesn't take into account anyone's circumstances. Lender policies and regulations change, so always confirm details with the lender. Visro does not provide credit assistance or financial advice.