The small business ombudsman has highlighted the need for brokers to help SMEs accessing finance, noting that it could reverse the decline in growth in this type of lending, help small businesses thrive and bring in new revenue streams for brokers.
Speaking to The Adviser, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell lamented that banks are lending less money to small businesses, urging brokers to enter into this space to ensure that the “engine room of the economy” can continue to turn.
Indeed, recent data from Scottish Pacific’s SME Growth Index shows that, for the first time in five years, the number of SMEs that turn to their main bank to fund growth has dropped below the 20 per cent mark.
When asked, “How are you going to fund your expected business growth in the next six months?”, 19.5 per cent of SME respondents said they would approach their main bank, a drop of more than 3 percentage points from September 2018 and down from 38 per cent when polling began in September 2014.
According to Scottish Pacific CEO Peter Langham, there were many reasons behind this trend, including banks’ credit conditions tightening, business owners looking for more flexibility and funding that allows them to grow, as well as the tightening property market and SMEs’ dislike of having to use property as security for their business loans.
Ms Carnell said: “Lending in the SME space is actually declining when it comes to the banks. And it is declining because the major banks – over the last 18 months or so – have really clamped down on lending to small businesses where there isn’t significant equity on property.
“So, if a small business doesn’t have significant equity in property, then the capacity to get a loan from a bank is very low, really.”
The ASBFEO added that, with property prices coming down in several of the major cities, the banks were looking at lower loan-to-value ratios and are being more risk averse in anticipation of a further decline in property prices.
“So, you put all those things together, and you’ve got the start of a credit squeeze in the SME space.”
Ms Carnell noted that this has, however, “opened up opportunities for other lenders in the area, and for brokers too, and that is a good thing”.
“Brokers would be crazy not to look at business finance and I think it is really important that they do,” she said.
Ms Carnell – who said she herself had used a broker to secure business finance for her businesses – emphasised that the small business lending space was “complex” with various different structures, products and lenders.
She therefore noted that brokers looking to enter into this space would need to ensure that they undertake relevant training and “have the skillset to understand the business and what their requirements are”.
“The small business space is complex because every single small business is different,” she said.
“There are more products and a range of different products in the marketplace, from invoice financing, balance sheet financing, equity, crowd sourcing, etc.
“It’s not the same as just adding business finance broking to your name and doing exactly what you always did. That would be a hiding to nothing and would also let down the SME sector and, in the end, the broker as well.
“But it is really important that brokers are involved in this area. A broker can provide a level of service to small business that they simply can’t do themselves. There is no way a small business will be able to understand all of these offerings and be able to determine whether they are the right ones for them, they are too busy running their business.
“But brokers are the perfect solution provider for this.”
The Australian Small Business and Family Enterprise Ombudsman added that offering small business finance would also help brokers bring in a new source of revenue – noting that broker remuneration is under scrutiny and could change.
She said: “The issue around trail commissions is not something that has just popped up since Hayne’s royal commission. The issues in that space have been around for a long time... so, from my perspective, smart brokers would have been restructuring their businesses and not totally relying on trailing commissions for their future growth. Because all business is about diversifying and all business is about understanding things change, whether it is a broking business or not.
“It is a very good thing for the broking industry to understand that change is going to happen and its important, like it is with all businesses, to diversify your business to grow where there are new opportunities and not rely on areas that could be and possibly will be subject to more regulation going forward.”
She concluded: “But I think it is really important for government – whatever the colour is – to understand that brokers are a really important part of the lending environment. Brokers help competition, they certainly help consumers and small businesses get a product better tailored to their own needs.”
Ms Carnell’s comments come as an increasing number of SME lenders and brokers look to partner in the SME finance space, and follow on from the recent approval of the $2 billion Australian Business Securitisation Fund (ABSF), designed to improve access to finance for Australia’s SME sector.
The ABSF will be administered by the Australian Office of Financial Management, which was previously involved in the residential mortgage-backed securities market in 2008.
The funding difficulties faced by small businesses has also been highlighted by a recent survey of 1,750 business owners nationwide, commissioned by SME lender Judo Capital and conducted by East & Partners.
[Related: New commercial finance diploma set to launch]
Annie Kane is the editor of The Adviser, Australia’s leading source of news, opinion and strategy for mortgage brokers.
As well as writing news and features on the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker podcast and In Focus podcasts and The Adviser Live webcasts.
Before joining Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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