Rising property values could see Australia’s SME owners return to the high-risk approach of relying on home equity to fund business needs.
- The 4.2% increase in property values over the past quarter may encourage SME owners to rely on home equity to secure business finance
- Already, three-quarters of SME lending is collateralised, typically with the family home acting as security, which concentrates risk for SME owners
- 56% of SMEs are operated by Gen Y and Millennials, yet home ownership in this demographic is down 30% over the past 25 years, limiting the ability of young entrepreneurs to source funding secured by home equity
- Many FinTech lenders such as OnDeck do not rely on home equity as a source of collateral but instead use data analytics and technology to determine an SME’s eligibility for finance.
Sydney (11 February 2020): Leading online SME lender OnDeck Australia today expressed concern that rising property values could see more SME owners resort to home equity as a source of business finance – a strategy that concentrates risk for SME owners and their families.
The residential property market has recorded gains of 3.70% nationally and 4.2% across the state capitals over the three months ended 31 January 2020in the final quarter of 2019.
While this is good news for the nation’s homeowners, it can present potential risks for Australia’s 2.3 million SMEs, many of whom rely on home equity as a source of business funding.
According to the Reserve Bank of Australia, “lenders have indicated that at least three-quarters of their small business lending is collateralised”, often with the family home acting as the key source of security.
Mr Cameron Poolman, CEO of OnDeck Australia, says, “We know that around eight out of 10 SMEs have business finance secured against the owner’s home. And this may rise following the uptick in property values.
The risk is that relying on home equity blurs the line between business and personal assets which can put an SME owner, and potentially their family, in financial jeopardy if the business fails.
“Lenders such as OnDeck use advanced lending technology and analytics to assess an SME’s eligibility for finance. This ensures SME owners and their families are able to keep their personal assets separate from business assets.”
Young entrepreneurs may not have the benefit of home equity
While home equity is often promoted as a source of business finance, many up-and-coming entrepreneurs simply may not have access to this resource.
Data from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) shows that over one in two (56%) SMEs are operated by Gen Y and Millennials.
Yet home ownership in this key entrepreneurial period of life (ages 25-34) is down by more than 30% over the past 25 years. For this demographic, the cashflow solutions provided by specialist SME lenders such as OnDeck can be especially valuable to drive business growth.
Awareness of online SME lenders is rising
Research by OnDeck confirms that one in four of Australian SMEs have been rejected for bank finance in the past. This has underpinned growing awareness of alternative lending options, with one in five SMEs saying they would partner with an online specialist lender such as OnDeck.
“Lack of access to capital is the single greatest impediment to small business growth in Australia. So it is good to know that alternative finance options including online lenders are on the radar of SMEs.
“We allow SMEs owners to quarantine their personal assets, in particular the family home, from their business, which can be an effective risk management strategy,” concluded Mr Poolman.
OnDeck (NYSE: ONDK) is the proven leader in transparent and responsible online lending to small business. Founded in 2006, the company pioneered the use of data analytics and digital technology to make real-time lending decisions and deliver capital rapidly to small businesses online. Today, OnDeck offers a wide range of term loans and lines of credit customized for the needs of small business owners. OnDeck has provided over $12 billion in loans to customers in 700 different industries across the United States, Canada and Australia. In Australia, OnDeck is backed by leading accounting software provider MYOB and has a 5-star rating from Trust Pilot. For more information, visit www.ondeck.com.au
About the research
AltFi research was conducted online in April 2019 by Honeycomb Strategy across 430 SME owners Australia-wide. The survey included SMEs with less than 50 employees, annual turnover of $50,000-$5 million, and in operation for at least 12 months.
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 CoreLogic Hedonic Home Value Index, January 2020 Results, Issued 3 February 2020
 Small business bosses use home equity as ‘piggy banks’ to keep doors open, AFR, 26 Feb 2018 https://www.afr.com/wealth/small-business-bosses-use-home-equity-as-piggy-banks-to-keep-doors-open-20180222-h0wh4d