Australian SMEs have historically been underserved in the unsecured and partially secured business lending space.
This is in part due to authorised deposit-taking institutions (ADI’s) focusing on large businesses, as the relative costs of processing smaller business loans under their legacy systems weighed down. In the five-year period to September 2019, Australia’s small and medium sized businesses primary choice of growth financiers shifted from main banks to non-bank lenders1. Over the same time period ADI banks saw a 33 per cent decline in (SME) business loan approvals while approval rates remained around 94%2 and the number of SME businesses grew by 6.96% over the five-year period to 30 June 20193. This shift in preference was driven by:
ADI’s requirement for owners of SMEs to post significant personal collateral;
Lengthy loan application processing times;
Lack of risk-based pricing; and
Lack of tailored durations due to ADIs on-balance-sheet funding models.
In 2016, Banjo Loans emerged as a solution to all four of these friction points, writing secured and unsecured loans with risk-based pricing, and rewarding strong businesses with loan durations tailored to the needs of each borrower’s unique situation. Banjo’s business characteristics and credit & underwriting systems impressed the Aura High Yield SME Fund, leading to the fund’s inaugural investment in 2017. With almost four years of partnership, the Aura High Yield SME Fund’s funding commitments have grown in line with Banjo’s book, helping to support over A$215m in loans to Australian SMEs.
This year has been an unprecedented stress test of Banjo’s credit & underwriting and servicing capabilities. Banjo’s communication with both its borrowers and the Aura High Yield SME Fund has been commendable. To date, Banjo has kept its loss rates consistently below 2%* and well below the credit enhancement embedded in its deal structure with the Aura High Yield SME Fund, even throughout the largest contraction in Australian Gross Domestic Product on record - an achievement Banjo accredits to its cutting-edge technology, credit experience and rigorous processes.
The team at Banjo have an exciting future ahead of them as they continue to act as an intermediary for Australian SMEs and the debt capital markets.
* Note that this is based on loans in arrears for more than 120 days.
Source: Australian Institute of Credit Management, December 2019
Source: Australian Banking Association Economic Report, September 2019
Australian Bureau of Statistics Source: 8165.0 Counts of Australian Businesses, including Entries and Exits, June 2015 to June 2019
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