Small business owners generally run away from discussions on financing because they are always so complicated, but it is suggested that small business owners should openly embrace the SME financing measures announced by the Morrison government with both hands.
Ask any small business owner about what keeps them up at night most and they will almost always tell you it is access to affordable finance.
For years now, small business owners have been required to jump through an ever-increasing series of hoops to satisfy the lending criteria of Australia’s big banks. Even if they managed to jump through all these hoops, the credit products offered to small business in Australia were generally three to four points higher than the loan products offered to big business.
The competitive distortion created by differential financing for small business was not just one between big and small business. With countries like the UK and Canada operating business growth funds for their SMEs, the current financing challenges are limiting the capacity of Australian SMEs to compete effectively with those in other countries in a digitally enabled global marketplace.
This is a longstanding issue for small business in Australia. It was one of the reasons COSBOA jointly chaired a roundtable meeting in Sydney earlier this year. Jointly chaired with the Reserve Bank of Australia and the Australian Bankers Association, the meeting was called to discuss the growing difficulties of small business financing.
Tightened lending criteria
The problems have since been exacerbated by the apparent response to the Hayne royal commission by the banks, which appear to have substantially tightened lending criteria for small business. While the big banks deny there has been any change in lending policy, small business owners report difficulty in securing loans with loan to valuation ratios (LVRs) above 30 per cent – just 12 months ago, the same businesses had been able to get LVRs at close to 70 per cent.
Regardless of the quality of the business, if a small business owner does not have the personal assets needed to secure a business loan then they have next to no chance of growing their business in the current lending environment.
Importantly, access to affordable small business finance is not simply a problem for small business. Given that Australian small business has been the source of most of Australia’s economic growth in recent times, poor access to finance for small business represents a lost opportunity in terms of economic and employment growth for the Australian economy at large.
In an ominous warning for the Australian economy, UBS recently suggested Australia was at risk of facing an economic “doomsday scenario” driven in large part by excessive credit tightening by the major banks.
Given the astounding and serious revelations of the Hayne royal commission, there is something manifestly unjust about Australian small business owners (and households) being penalised for apparent systemic failures of Australia’s big banks to adopt proper and prudent lending practices.
Thankfully, the Morrison government appears to agree and has responded to the issue of small business financing that is particularly elegant.
Elegant in the sense that the Morrison government’s response addresses the financing challenges for both start-ups and established businesses seeking to grow, creates increased competition for SME financing by making it easier for smaller lenders to access loan capital, and does so without threatening Australia’s overall credit rating.
The solution comprises two funds. The first, the $2 billion Australian Business Securitisation Fund (ABSF), will undoubtedly make it easier for SMEs to access capital for investment in business growth for established businesses. The second, the new Australian Business Growth Fund (ABGF), will address an age-old issue associated with the difficulty of securing equity funding for start-ups.
The beauty of the ABSF is that the government will buy packages of secured and unsecured SME loans for credit providers including smaller banks and fintechs. This will increase competition in the Australian SME lending space, ultimately placing downward pressure on the cost of loan products for small business owners.
COSBOA understands that the ABGF will be modelled along similar lines to schemes operated by governments in the UK and Canada. The fund will make it easier for Australian entrepreneurs to secure equity funding without having to pay through the nose for funds or being required to give up majority ownership of their fledgling business – currently the only choices for the owners of start-ups in Australia.
And the bonus is that these funds involve limited risk for taxpayers, with the opportunity for the Australian government to on-sell packages of secured and unsecured loans struck under the ABSF. That not only eliminates any material risk to Australia’s credit rating but provides a mechanism for replenishment of the fund – and delivers significant upside for future government income.
The ABSF and the ABGF are outstanding responses to the decade-long challenges of SME financing in Australia. Once implemented they will enable small business owners to invest in growth, with consequent benefits for Australia’s economic prosperity and employment.
Mark McKenzie is the chair of the Council of Small Business Organisations of Australia (COSBOA). David Gandolfo is the deputy chair of COSBOA and president of the Commercial Asset Finance Brokers Association of Australia Ltd (CAFBA)
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