Non-conforming lenders fill bank gap?
Sherman Ma, Liberty Financial's managing director, claims that the banks are taking an increasingly tough stance on loans to small businesses, with many applications now being rejected. Mr Ma said that new customers are coming to Liberty who formerly could have gained access to bank finance, and they're complaining that what was once “conforming” is now “non-conforming” to the banks.
The non-conforming loans market provides finance for customers who don't readily fulfil banks' normal lending criteria, not necessarily because they're poor credit risks but often because they have no credit history. While the non-conforming market is usually associated with housing finance, Liberty also offers commercial loans to small business, often secured by property.
Non-conforming lenders are generally more expensive than banks but cheaper than finance companies. A small business owner, for example, may get a bank loan at around 6 per cent interest, while non-forming lenders would charge between 7 and 12 per cent. Finance companies can charge between 10 and 25 per cent.
Mr Ma said that Liberty is writing $100 million in loans each month, over 40 per cent of which is to small businesses. We don't have the same level of documentation requirements as the banks, he said. We don't necessarily have to see tax returns, and we can take a more individualised approach – less of a “black and white” credit process.
Mr Ma said that Liberty had experienced a surge of loan applications after the last interest rise increase and he expects that further rate rises will mean more customers – the numbers depending on “how fast rates move”.