Prime Capital keeps pace with small-business borrowers

Prime Capital has carved out a space in lending to small businesses and the self-employed, enjoying annual growth of more than 30 per cent even as the pandemic disproportionately affected its target borrower segment. Now there is a new challenge: rising interest rates and inflation. Prime Capital and its customers are adjusting and weathering the storm.

While the COVID-19 pandemic and the government response to it made for uncertain markets, it ultimately led to a revived focus on property investment. Prime Capital’s borrower base was no different. The company’s Sydneybased chief executive, Paul Scanlon, says demand for its products increased in the pandemic era but with no spike in arrears in the loan book.

“The nonbank sector has seen an enormous amount of growth over the past couple of years, with mortgage book system growth at record levels,” Scanlon tells KangaNews. “I have been doing this for 25 years and I have never seen growth in the system at this pace before.”

This year, however, has brought a new set of conditions that have made Prime Capital’s growth trajectory more challenging. But Scanlon suggests this is more an issue for business operations than for underlying asset quality. For instance, record low unemployment has made talent acquisition more difficult at a time when rising interest rates are adding to the company’s administrative workload.

“The war for talent is real. Attracting and retaining high-quality talent is very difficult, and made more so because of record low unemployment around the country. This is a challenge we share with our clients,” Scanlon says.

He notes that rising interest rates have prompted an increase in enquiries for new loans even as the company works to keep up with rate changes and help customers with the transition.

“The big challenge for us has not been that there have been rate rises, but the speed and frequency at which they are coming,” Scanlon says. In particular, keeping customers up to speed on their obligations and options against the quickly changing rates backdrop requires extensive administrative resources.

In addition to rising rates and low unemployment, Scanlon cites the return of banks to lending markets – and the accompanying downside risk to demand for nonbank lending – as a major challenge to the SME lending segment.

“The federal government, through the Reserve Bank of Australia, supported the big four banks with virtually free money for two years, which meant they were not in the term-out market and nonbanks were able to be more relevant,” Scanlon explains. “The challenge going forward will be how we can continue to attract these customers now the banks are back and have invested in systems and processes to increase their capacity. We have to remain relevant to keep to the same growth trajectory.”

For Prime Capital’s customer base, the pace of interest rate increases has been the biggest shock. So far, Scanlon notes, the company’s loan book performance has remained robust.

“Nontheless, we are concerned about how long this can last – there must be a point at which rising interest rates have an impact, and we are bracing for it,” he continues. “Small businesses can and do plan their cash flow very well – better than many expect. But it is difficult to predict things that are moving as quickly or as sharply as they are now, specifically the series of consecutive rate rises we are receiving from the reserve bank.”

MODERATED GROWTH

One way Prime Capital is planning to deal with the changing times is to ease back its growth trajectory while conditions remain uncertain. “We are a relatively conservative firm, and where we cannot easily predict or have strong levels of comfort in our prediction for the future we are quite happy to moderate our growth,” Scanlon says. “We would like our growth to ease over the next 12 months while we understand how the market responds to interest rate rises.”

Scanlon suggests markets are likely to remain choppy for as long as central banks are using rapid interest rate rises to combat high inflation, with “everyone playing catch-up and concerned about when these measures will bite into economies”.

With markets reacting to the changing macroeconomic landscape and equilibrium still a long way off, Scanlon says Prime Capital will continue to seek to serve its borrower base while tempering its growth until markets have adjusted. “We view these next 12 months as a period of cautious optimism,” he comments. “Our customers have been fantastic performers over our 25-year journey, and our business has grown in response to them being successful.”