As the world comes to terms with the shock election of Donald Trump as US President, we believe that financing Australian businesses is likely to become more challenging with knock-on consequences for our next election.
In the mid-market alone, we estimate that up to $15 billion in working capital finance could be required every year to catapult our most dynamic businesses forward. With annual revenue of $5 million to $250 million and 50 to 500 employees, they are the engine room of our economy. But the Trump Tsunami is about to make things harder.
Risk premiums have now gone shooting up as uncertainty prevails and markets factor in Trump's promise to slash taxes and increase spending. Short-term gain, long-term pain. US monetary policy is now a wildcard with Janet Yellen unlikely to remain as Chair of the Federal Reserve. US interest rates may remain on hold for a while longer but are likely to rise if Trump's policies are enacted to boost short term growth.
What does this mean for Australian business finance? Our Big 4 banks are among the world's most reliant on bond funding with some $500 billion of notes outstanding, according to Bloomberg. Overseas investors provide most of the funding and look for higher yields to compensate for higher risk. They are sensitive to yield differentials eg higher yields in Australia than in the US attracts investors. Our country's AAA rating being in jeopardy adds to the risk calculation. All of this means more expensive bank loans and tighter credit criteria. Less new business credit at higher cost is the likely outcome.
At the same time, banks are withdrawing from lending to small-medium sized businesses (SMEs) and are only interested in SMEs to attract cheap deposits to fund mortgage loans. International regulatory capital rules ('Basel III' and soon 'Basel IV') make it nearly 4 times less attractive for banks to lend to SMEs.
As a result, bank lending to SMEs has stagnated in the 8 years since the GFC, growing at a little over 3% annually to $269 billion. Since 2013, only 11% of new business lending has gone to small businesses. Most of the $900 billion of loans outstanding to businesses goes to the big end of town. Meanwhile, mortgage lending growth has exploded out to $1.5 trillion, up $294 billion in just the last 3 years.
Private equity is not flourishing either. According to the Australian Private Equity & Venture Capital Association - AVCAL - Australia has around 30,000 businesses which fall within the private equity ‘investment range’: businesses that have growth potential and which are likely to require significant capital injections to realise that potential. PE funds are currently invested in fewer than 350 businesses in Australia: meaning that they presently have the funding capacity to financially back less than 2% of the total ‘investable pool’ of up to 30,000 businesses.
What about the new breed of online lenders? Can they fill the void? It's a big funding gap, particularly when it comes to helping our most dynamic mid-sized companies. The mid-market employs 1 in 4 Australians and with a combined annual turnover of over $1.1 trillion are bigger than Queensland's economy. They typically need funding well in excess of the amounts available from most online lenders where the focus is on short term loans of up to $150k to smaller SMEs.
Access to growth capital for established businesses is tighter than ever. Unless Canberra takes concerted action, the Trump Tsunami is likely to make it a whole lot harder for our businesses to find finance to grow and add jobs. All of this adds to the risk of our own Trump Moment at the next election. Time to roll up our sleeves and sort it out.