Non-bank lenders playing a growing role as RBA rate increases tighten borrowing costs for businesses

Interest rates have risen – which means borrowing costs are increasing for Australian small businesses.

With inflation taking longer than expected to return to the RBA’s target range, the central bank lifted the cash rate at its February board meeting, bringing an end to the shortest rate-cutting cycle on record. Economists, bolstered by the RBA’s own guidance, now expect further rate rises over the year ahead.

For SMEs, the timing is challenging. While economic conditions have improved modestly over the past year, they remain subdued. Confidence is still weak and access to finance continues to be a pressure point. Business NSW estimates the latest rate increase alone could cost small businesses up to $1 billion.

The latest RBA rate hike is accelerating a shift that’s been underway for several years, with more SMEs moving away from traditional banks and towards non-bank lenders to fund their growth.

While inflation has fallen significantly from its 2022 peak, the RBA has made it clear that price pressures are proving more persistent than expected.

In a statement, the central bank cited stronger-than-anticipated rebound in demand across the economy as a major factor. Household spending and business investment have both accelerated in recent months. At the same time, growth in the economy’s supply capacity has remained constrained, intensifying pressures.

The RBA also signalled that economic uncertainty remains elevated on all sides. On the domestic front, stronger-than-expected demand combined with limited supply-side growth risks adding further pressure to prices. Internationally, while geopolitical risks remain, growth among Australia’s major trading partners has surprised, providing less of a dampening effect than previously expected.

These factors suggest the latest increase is unlikely to be the only one this year. For small businesses, this means borrowing costs are likely to stay higher for longer, even as demand remains uneven and operating margins remain under pressure.

Access to finance has traditionally been a challenge for many small businesses. One in five SMEs has experienced difficulty obtaining finance, according to the RBA, limiting their ability to invest, innovate, or respond quickly to change.

Traditional banks tend to assess small businesses as higher risk, and SME loans attract higher capital requirements. The result is slower, more conservative lending, often tied to property or personal assets.

What has shifted is where improvements in access to finance are coming from. The RBA notes that competition from specialist and non-bank lenders has driven faster approvals, simpler application processes, and a broader range of funding options, including unsecured finance and facilities backed by non-physical assets.

Non-bank lenders have steadily increased their share of SME lending, supported by investment in digitisation and automation. By assessing applications using transaction data and cash-flow performance rather than property security alone, they are able to move more quickly and offer structures better suited to how many small businesses operate.

As borrowing costs rise and major banks become more selective, speed and certainty are becoming as important as price. For many SMEs, that is making non-bank business lenders an increasingly attractive option.

The recent rate increase after several holds shows the path back to lower interest rates is likely to be longer than many SMEs had hoped. With inflation proving more persistent and further increases still on the table, small businesses are facing a period of higher borrowing costs alongside uneven demand and tighter margins.

In that environment, access to flexible finance matters more than ever. While traditional banks remain a core part of the lending landscape, the latest data shows that many of the most meaningful improvements in SME finance are being driven by non-bank business lenders, through increased competition, faster decision-making, and more flexible funding structures.

As economic conditions remain uncertain, the ability to secure finance that is timely, fit-for-purpose and aligned to how a business actually operates will be critical. 

With borrowing conditions tightening, now is the time to review how your business is funded. Octet’s finance solutions are designed for modern SMEs, helping businesses unlock working capital tied up in unpaid invoices and access tailored lines of credit, so they can maintain their momentum in an uncertain economy.

Whether you need to streamline payments to local and overseas suppliers, improve your cash flow, or secure fast, flexible funding that moves at the speed of your business, Octet delivers business finance solutions built for growth.

Talk to our team today to learn more about how we can help your business navigate challenges and achieve your goals.