SYDNEY, Sept 7 (Reuters) - Australia's banking regulator on Tuesday said it had granted Avenue Bank, a digital SME lender partly funded by Liberty Financial Group, a banking licence that would allow it to conduct limited operations.

Avenue specialises in small business financing and in July it said it was seeking to launch its first digitally-enabled products for businesses in late 2021.

The lender joins Judo Bank, which is preparing to list in the Australian stock exchange, in appealing to businesses seeking alternative options to the Big Four lenders that dominate the country's debt market.

Representatives for the lender did not immediately return an email seeking comment. Its licence, under which it is not required to meet the regulator's full prudential framework for banks, is valid until Sept. 7, 2023, according to its website.

Australian Prudential Regulation Authority (APRA) uses two main avenues to approve new banking operations in the country, the direct and the restricted route.

The latter involves a permit to conduct "limited banking business" for a maximum of two years before obtaining a full licence.

(Reporting by Paulina Duran in Sydney; Editing by Louise Heavens)