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$83bn SME funding gap exposed

by Charbel Kadib6 minute read
Chris Bayliss Judo Capital

New research has shed light on credit constraints in the SME space, compounded by a lack of trust in banking institutions.  

According to a survey of 1,750 business owners nationwide, commissioned by SME lender Judo Capital and conducted by East & Partners, the gap in SME funding, which has emerged from an inability to access finance that they would otherwise utilise, has surpassed $83 billion.

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The Judo research found that the average SME applied for $800,000 in new borrowings in the last year, with those that successfully obtained finance securing $600,000 in new credit, while the average unsuccessful credit application was $1.1 million.

According to respondents, the main reason SMEs were prevented from accessing credit in the last year was as a result of collateral requirements (34 per cent), slow turnaround times (16 per cent), inappropriate terms/structure (11 per cent), interest rate (8 per cent), and an unsatisfactory credit rating (4 per cent).

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Conversely, SMEs that accessed the full amount of new capital they sought cited credit approval speed (63 per cent), ring fencing of security needed away from personal assets (58 per cent), actual availability of the full debt sum being sought (50 per cent) and mitigating terms and conditions (42 per cent), as the most important factors in completing the deal.

Judo Capital’s chief customer officer Chris Bayliss observed: “[The] research confirms what we understood to be true, namely, that there is a big and growing gap between what the banks currently offer and what SMEs want and need.”

He added: “This means that SMEs, which account for over a third of Australia’s GDP and employ over 40 per cent of the nation’s workforce, are being held back by the banks from accessing the funds they need.”

SMEs have ‘lost faith’ in banks

Further, the survey revealed that approximately 90 per cent of SMEs would rather seek lending advice from friends and colleagues than a bank.

Additionally, when asked to rate their trust in banks on a scale of 1 to 10, where 10 is the highest level of trust, SME respondents scored banks at just 2.5 points.

Judo’s chief risk officer Jacqui Colwell said that the findings confirm that SMEs seeking credit have “lost faith in the banks to provide the funding they desperately need”.

Ms Colwell urged the financial services royal commission to address the trust deficit and funding gap.

“Small businesses represent 97.5 per cent of all businesses operating in Australia and employ 44 per cent of people in the private, non-financial sector, so it is critical that we address issues arising from the banks’ dealings with SMEs that were exposed during the royal commission.

“SMEs are now looking to the commission’s final report and recommendations to address the reasons for their loss of trust in the banks.”

Ms Colwell added that the lack of trust was “symptomatic of a long-term decline in SME lending standards”.

“This loss of trust has been happening for some time, driven by an imbalance of power between the banks and its SME customers; the gradual destruction of the relationship that used to exist between a bank and its customers; and a lack of true competition,” Ms Colwell said.

“Judo’s mission is to provide credit-starved Australian SMEs with a real alternative to the banks. We are doing this by bringing back the craft of relationship banking where time spent understanding our customers’ businesses and judgement-based decisions are paramount to how we operate.”

She concluded: “We hope that the banking royal commission has listened to what SMEs need, and that this dynamic sector, which has for too long been ignored or taken for granted, can finally receive this support it critically needs and deserves.”

[Related: Government opens consultation on $2bn SME fund]

$83bn SME funding gap exposed
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Charbel Kadib

Charbel Kadib

AUTHOR

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

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