Financing your growth - bank computer says no

The daily pressure on small-mid sized businesses (SMEs) is widely reported but it is rare to see much in the way of well informed advice.

I grew up in a banking family in the days when bank managers had more discretion and knew their business customers well. Still, it should be remembered that most businesses were not pure service businesses in those days so mortgages and leasing solved most problems.

I have spent 30 years working with hundreds of growing companies and investors. It's about time we had an honest conversation between policy makers, financiers and business people. Australia really needs growing, prosperous businesses to provide good jobs for the next generation and right now the road ahead seems to be blocked.

Traditionally, the first port of call for a business owner is his bank. There needs to be a clearer understanding about what banks are incentivised to do these days. They are not interested in unsecured lending to SME businesses - overdrafts, working capital, etc. Regulatory capital weightings penalise banks for lending on anything but real estate by a factor of about 4x. That's before even considering the high staff costs involved in making and monitoring credit decisions involving non-real estate collateral. Too hard. This is why credit cards are the main source of working capital for SMEs today but try getting a $200k limit!

Example: $100 of mortgage requires the bank to have about $2 of its own capital but $100 of business overdraft requires over $7.

So our strong advice would be to speak to an experienced commercial finance broker and a good accountant. Even then, they may not be aware of all your options as there are many alternative finance firms appearing on the market these days and it's hard to know who is good. However, they should give you an honest appraisal of the conventional options: mortgages, leasing and other traditional asset finance facilities.

Look around yourself to learn more about intermediate capital options eg finance which is somewhere between secured bank debt and equity. Be very wary about lock-ins, guarantees and obscure termination provisions - don't do it!

Watch-out for 'over-collateralisation' - don't give away all of your valuable security to obtain a much smaller credit facility.

Above all, ask questions and plan ahead. Too many businesses suffer because finance is overlooked in the frenzy of getting the work done every day.

Of course, it would be great if government began to realise the powerful effect it could have if it became more supportive of the fast developing alternative finance community, especially those focused on backing small businesses. The key message that needs be heard is that to grow a business these days, one of the main ingredients is speedy cashflow. Fixing this problem has amazing effects. Just have a look at some of the achievements overseas.

Happy to discuss.

Dermot Crean