Time to ease the credit squeeze

To invest in future growth, small businesses must improve cashflow and secure finance. Although these two areas have become challenging recently, there are some promising developments.

Small businesses are feeling the squeeze when it comes to securing finance, as lenders become more risk averse in the wake of the Banking Royal Commission.

A recent poll of the finance broker industry by Apricity Finance revealed 70 per cent of brokers felt cashflow is “definitely more” of a problem for small business than it was 12 months ago, and 92 per cent of brokers agreed finance was “more difficult” to get since the Royal Commission.

The survey showed those most likely to suffer from cashflow problems were those small businesses with an annual turnover of less than $5 million. Although that’s the majority of small businesses, it seems younger business owners have had a particularly tough time of late. The latest findings of the MYOB Business Monitor show over 40 per cent of gen Y small businesses applied for finance in the last year, with more than a third of those applications knocked back.

A possible reason for this is declining home ownership among gen Ys; meaning young people starting up new businesses do not have the equity in a home to secure the loan.

“It’s been encouraging to see growth in the fintech space, giving small businesses another avenue to finance.”

This has prompted criticism of the lending system, with some questioning why small-business owners should have to put up their home as collateral in order to expand their business.

In fact, about eight in 10 small-business owners have loans or lines of credit secured against their homes, instead of cashflow or business growth.

But as lenders look to reign in loan-to-value ratios and subject borrowers to more onerous serviceability checks, small businesses will continue to feel the credit crunch.

The fact is, small businesses need access to finance to invest in their future growth.

It’s been encouraging to see growth in the fintech space, giving small businesses another avenue to finance. The popularity of fintech lenders has been growing since they hit the Australian

market in 2013. They’ve grown from lending $10 million in the first year to $389 million in 2017. That growth has been due in large part to the ability of fintechs to serve SMEs.

According to the Digital Financial Analytics SME Report, banks reject about 75 per cent of small-business loan applications. These businesses are more likely to be approved by a fintech lender.

Equally, the Australian Securities and Investments Commission (ASIC) has given the green light to a number of challenger and neo-banks, some of which are SME focused.

More competition in the small-business lending market could only be a good thing. It will lead to more product innovation and could even pave the way for the next generation of SME financiers.

There are some promising developments in the pipeline on this front. Prior to the federal election, the Coalition government introduced legislation to establish a $2 billion Australian Business Securitisation Fund. This will offer wholesale funds to smaller lenders at interest rates comparable to those available to the major banks so they can lend to SMEs at competitive rates.

Meantime, the federal government announced a $100 million investment to kick-start an Australian Business Growth Fund. Two of the big banks – National Australia Bank and the Commonwealth Bank of Australia – along with HSBC Bank have indicated they will match the investment. The fund will provide equity funding to high-growth potential SMEs.

The bottom line is that access to credit is one of the most serious issues facing small business today. The Reserve Bank of Australia has signalled this problem could be a factor in a slowing economy. Both the Australian Prudential Regulation Authority and ASIC have adopted very risk-averse positions which have made the situation worse. They have the power to change it and they should.

Kate Carnell AO, Australian Small Business and Family Enterprise Ombudsman

This story first appeared in issue 25 of the Inside Small Business quarterly magazine.

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