Non-Bank Lending and Cash Flow Finance for SMEs: How It Works and When It Makes Sense

For decades, small business lending in Australia meant one thing: put up the family home and the bank would lend against it. Plenty of business owners still borrow that way. But a growing share of SME lending now comes from non-bank lenders that assess the business on its cash flow, not the bricks and mortar behind it.

Used well, cash flow finance is fast, flexible and doesn't tie up property. Used badly, it's an expensive way to paper over a cash flow problem. Here's how it works and how to tell the difference.

What Is Cash Flow Lending?

Cash flow lending is finance assessed mainly on the business's trading performance: its turnover, the money moving through its bank account, and its ability to meet repayments from that cash flow. Property security is either not required or plays a secondary role, usually backed by a director's guarantee.

Non-bank lenders lead this market because they're built for it. They connect directly to your business bank account and accounting software, read months of transaction data in minutes, and make decisions from it. Many can approve in a day or two, where a bank might take weeks.

The Main Types of Non-Bank Cash Flow Finance

• Unsecured business loans. A lump sum, usually repaid over a few months to three years, often by daily, weekly or fortnightly repayments. Suited to a defined need such as stock, a fit-out or a short-term opportunity. See unsecured business loans.
• Business lines of credit. A revolving limit you draw and repay as needed, paying interest only on what you use. The non-bank equivalent of an overdraft, without the property security.
• Invoice finance. An advance against your unpaid invoices, so you're not waiting 30, 60 or 90 days for customers to pay. The facility grows with your sales. See invoice finance.
• Trade and supplier finance. Funding to pay suppliers up front, repaid once the goods are sold. See our article on trade and import finance.
• Revenue-based finance. Repayments taken as a percentage of daily card or online sales, so they rise and fall with trading. Common in retail, hospitality and e-commerce.

How Non-Bank Lenders Assess Your Business

• Time in business. Many lenders want at least six to twelve months of trading, with more for larger amounts.
• Turnover and bank account behaviour. Consistent deposits, healthy average balances and no regular dishonours count for more than a single year's profit figure.
• Existing debt. Lenders can see repayments to other lenders in your bank statements. Several short-term loans at once is a red flag.
• ATO position. Tax debt isn't always a deal-breaker, but lenders want to see it on a payment plan and lodgements up to date. See financing ATO debt.
• Credit history. For both the business and its directors.

What It Costs, and How to Compare Offers

Cash flow finance costs more than a property-secured bank loan, because the lender is taking more risk and moving faster. That's fine if the facility earns its keep. The problem is that offers are quoted in very different ways, which makes them hard to compare:

• Factor rates and simple interest. Some lenders quote a fixed amount to repay, such as $1.20 for every $1 borrowed, rather than an annual interest rate. Over a short term, that can be far more expensive than it looks.
• Fees. Establishment, account-keeping and drawdown fees add to the total cost.
• Repayment frequency. Daily or weekly repayments take cash out of the business faster than monthly ones.
• Early repayment. Some lenders charge all the interest even if you repay early. Others give a discount. This matters if you plan to refinance to a bank later.

Always compare offers on the total amount you'll repay and the effective annual cost, not the headline rate. Two loans with the same "rate" can differ by thousands of dollars once fees, repayment frequency and early payout terms are included.

When Non-Bank Cash Flow Finance Makes Sense

• You need funds quickly for a defined opportunity, such as discounted stock or a new contract.
• You don't own property, or don't want to put the family home on the line.
• The business is growing faster than a bank's appetite, or is too young for bank policy.
• Your bank has declined for policy reasons, such as industry, a recent loss or ATO debt, rather than because the business can't afford the repayments.
• You need a bridge to a bank facility once your next set of financials is lodged.

When to Be Careful

• Stacking. Taking a second or third short-term loan to cover repayments on the first is a cash flow spiral, not a solution.
• Funding losses. If the business is losing money, more debt delays the problem rather than fixing it.
• Mismatched terms. Funding a long-term asset with a six-month loan puts pressure on cash flow it doesn't need.
• No exit plan. Know how and when you'll move to cheaper finance before you sign.

For more detail, see bank vs non-bank lenders, the true cost of short-term business loans, getting a short-term loan approved fast, private credit for mid-market businesses and refinancing from non-bank back to the bank.

How a Broker Helps

The non-bank market is large and changes constantly. Lenders' appetite, pricing and policy shift month to month. We know which lenders are competitive for your industry and deal size, compare offers on true total cost, and structure the facility with an exit to cheaper debt in mind. Where a bank or second-tier lender would do the deal at a lower price, we'll tell you.

Book a free, no-obligation consultation and we'll look at what's driving your cash flow need and the right facility to fund it. For a broader overview, see working capital finance.