The Australian Small Business and Family Enterprise Ombudsman has commenced a formal inquiry into improving access to capital for SMEs.
The inquiry, called Affordable Capital for SME Growth, will evaluate models that international governments have utilised to bridge the SME funding gap and understand whether they can be replicated in Australia.
Specifically, the inquiry will explore the approaches taken by the British Business Bank and the US Department of Treasury’s Small Business Lending Fund, as well as examine Australian initiatives, such as Jobs for NSW, where the government shares the lending risk.
Speaking with The Adviser, Australian Small Business and Family Enterprise Ombudsman Kate Carnell clarified that she is not suggesting that governments get back into banking — an idea that the Greens proposed earlier this week. Rather, the inquiry seeks to understand how the government can reduce the perceived risks of lending to SMEs.
The Small Business Ombudsman noted that the British Business Bank and the Small Business Lending Fund do not lend directly to small businesses.
The former provides government-backed 75 per cent guarantee against the outstanding facility balance, significantly reducing the risk for lenders. The latter makes investments in eligible financial institutions to increase the availability of credit to small businesses.
Ms Carnell noted that 80 per cent of SME loans in Australia are being provided by the major banks. Within this segment, 80 per cent of the loans are secured against the business owners’ homes, meaning that if the businesses fail, their homes can be repossessed by the banks.
This is problematic given the declining rate of home ownership in Australia, especially in Sydney and Melbourne, the Ombudsman added.
“The need for equity in property coupled with a decline in the levels of home ownership, particularly in younger age groups, is resulting in the funding gap widening further,” Ms Carnell said.
“This new inquiry will make recommendations to allow SMEs that are trying to grow their businesses to have affordable access to the capital they need.”
While there are alternative lending options available in the market, Ms Carnell pointed out that other types of lenders don’t always hand out large loans, which can be problematic for SMEs intending to ramp up their growth efforts as well as individuals looking to acquire small- to medium-sized businesses.
“Even a basic pharmacy is going to set you back a million dollars. You might be able to get one of the major wholesalers to give you some credit on the stock. But even for a business that is trading really well, even if you’ve got experience, a good business case and you look like a good risk, it’s still hard to get a loan if you don’t have bricks-and-mortar security or cash security. If you had the cash, you wouldn’t need the loan,” the Ombudsman said.
“Smaller cash flow-based loans [and] loans secured against bricks and mortar has become the norm. The perception is SME loans are riskier than bricks and mortar loans [and] the profitability of bricks and mortar loans is higher. I suppose markets tend to gravitate to where the profit is better.”
Ms Carnell additionally expressed the fact that the fifth biggest bank in Australia, from a lending perspective, is the “bank of mum or dad”.
“That’s a real problem for two reasons: one is that it creates inequity as much as if you’ve got rich parents. The other thing that’s concerning is parents, even pensioner parents, have provided their home as equity for kids that wanted to buy a business. There have been cases where pensioner parents lost their homes,” Ms Carnell said.
Another concern is that a lot of SMEs in Australia are owned by Baby Boomers who are looking to sell their business.
“You can’t sell your business if there is nobody who can raise the money to buy it,” Ms Carnell said.
The Australian Securities and Investments Commission found that the number of SMEs turning to marketplace lenders had increased more than six-fold from 33 in FY16 to 201 in FY17. The total amount borrowed in FY17 was $47 million, up from the $26 million recorded in the previous financial year.
Average interest rates had also increased year-on-year from 10.5 per cent to 13 per cent, with 77 per cent of SMEs paying between 12 per cent and 15.99 per cent interest in FY17.
Scottish Pacific’s latest SME Growth Index similarly highlights a growing appetite for non-bank funding options among SMEs. Of the non-bank lending options that growth SMEs said they used in 2017, 77 per cent opted for debtor finance, 23 per cent selected merchant cash advances, 10 per cent turned to peer-to-peer lending, 9 per cent chose crowdfunding and 5 per cent went with other online lenders.
Twenty-two per cent of the 1,200 Australian SMEs surveyed communicated their intention to use non-bank lenders to fund upcoming growth, and 48 per cent of the SMEs who didn’t use non-bank lending in 2017 are considering it for 2018.
On completion of the inquiry, regulatory bodies will come together to discuss potential solutions.
The inquiry report is slated for publication in July 2018.