A new report from the Reserve Bank of Australia has highlighted recent innovations in the business finance space that could make credit more available to start-ups and small businesses looking to expand.
The report, titled The Availability of Business Finance and authored by Ellis Connolly and Ben Jackman, notes that large companies generally have no trouble accessing finance from the banks.
It highlights that foreign banks have been expanding their operations in Australia, competing “vigorously” with domestic banks to lend to large established businesses.
“In contrast to large businesses, it remains challenging for young small businesses to fund their expansion plans,” the report said.
“Prudent lenders require evidence that a business can service the loan from its cash flow; this is difficult for an entrepreneur starting a business to demonstrate. To obtain a bank loan of sufficient size at a reasonable interest rate, entrepreneurs often need to provide personal guarantees and collateral.
“This concentrates their risk and excludes those who do not have existing wealth to draw upon. Given the risk profile of start-up businesses, equity financing would often be more appropriate, but there have been few avenues for such financing in Australia.”
The report flagged several innovations that could improve access to finance for start-ups, particularly comprehensive credit reporting and alternative funding platforms.
“While alternative financing platforms are growing rapidly, at this stage they remain a very minor source of funding for businesses, including in Australia,” the report said.
“The Australian market is reported to have commenced around 2013 and provided around $600 million in finance to businesses in 2016. The largest alternative finance markets are in China, followed by the United Kingdom and the United States. However, all of these markets remain small relative to the size of their economies,” it said.
Data collected by ASIC indicates that most marketplace lending in Australia is for relatively small loans to consumers at interest rates comparable to personal loans offered by banks.
The report found it is unclear whether marketplace lending platforms are significantly reducing financing constraints for small businesses.
[Related: Opening the door for SME finance]
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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