SME banking

We need to change direction - our housing credit bubble is leaving business behind

Interesting article by Christopher Joye in the AFR today - see below - calling out our policy makers for spurring on our consumer credit bubble. Businesses are left behind.

It really matters that credit should be available for business purposes to finance growth. But our system allows banks to leverage house loans 40 times compared to 'only' 10 times for an SME loan.

So small-medium sized businesses that employ must of us don't get a look in...unless they own some real estate of course.

BANK LENDING TO SMES IS IN LONG TERM DECLINE GLOBALLY AND IN AUSTRALIA – OUR BANKS HAVE TURNED INTO BUILDING SOCIETIES AND THIS IS HOLDING BACK OUR ECONOMY

Our banks only want to lend against houses. Since 2013, only 11% of new business lending in Australia has gone to small businesses with little growth:

  • Most of the $900bn of loans outstanding to businesses goes to the big end of town
  • $269bn lent to SMEs is swamped by over $1,500bn in residential mortgage lending
  • Banks see SMEs as a critical source of cheap deposits – SME deposits far outweigh SME loans
  • But SMEs employ the bulk of our workforce

Due to global regulatory capital rules (Basel III), mortgages are more than 3 times more profitable than SME loans:

  • Real estate carries a risk weighting of 25% but SME loans require 100% (75% if backed by real estate)
  • Banks have effectively withdrawn from their original purpose: facilitate commerce

Meanwhile SME growth and employment is constrained by lack of cashflow facilities:

  • Banks will only lend to SMEs with real estate security which is a problem in a service based economy
  • The ATO/taxpayer is forced to act as lender of last resort (ATO is owed $12.5bn in tax by SMEs and growing rapidly)
  • Tight cashflow holds back growth:

The RBA is blowing the mother of all bubbles

Can history be repeated? A mistake was cutting rates after the Fed's initial rate hikes "led to a sharp downturn in the housing market in 1966". RICHARD DREW

Can history be repeated? A mistake was cutting rates after the Fed's initial rate hikes "led to a sharp downturn in the housing market in 1966". RICHARD DREW

by Christopher Joye

With US employment growth again surprising forecasters and the jobless rate declining to a boom-time 4.7 per cent, below "full-employment", the question is whether central banks, and the Federal Reserve in particular, are "behind the curve".

In research this week Goldman Sachs assessed this using a framework previously advocated by Fed chair Janet Yellen. Goldman found "the Fed's current policy stance is about 1 percentage point easier than prescribed by a Taylor rule that uses a depressed neutral rate" and about 3 percentage points easier when adopting a more normal neutral cash rate of about 4 per cent. The latter assumption "implies that the current policy stance represents the largest dovish policy deviation since the 1970s", which coincided with an inflation break-out.

"The implication that current policy is somewhat 'too easy' is consistent with the fact the [US] financial conditions index remains easier than average and is still delivering a positive growth impulse at a time when the Fed is trying to impose deceleration," Goldmans said.

The investment bank warns "history counsels caution about falling behind" with the experience of the mid 1960s suggesting that inflation increases much more quickly at very low unemployment rates. Back then, years of benign inflation gave way to a sudden spike as the Fed wilted under political pressure not to aggressively tighten rates. A mistake was cutting rates after the Fed's initial rate hikes "led to a sharp downturn in the housing market in 1966".

Federal Reserve Chair Janet Yellen: The third rate hike since the 2007-2009 recession was well telegraphed. Andrew Harnik

Could history repeat itself? Much hinges on policymakers' humility. Central bankers are not fond of acknowledging errors, often rationalising ex post facto via the meme that "this time is different", which can be exacerbated by the desire to propagate an image of infallibility. Remember the once-lionised monetary maven Alan Greenspan?

These risks have certainly spooked interest rate investors, although the adjustment process has a way to run. After the second biggest fall in fixed-rate (as opposed to floating-rate) bond prices in modern history in the December quarter, the spectre of a Fed hike in March - duly delivered this week - has lifted long-term rates further. 

Will RBA ever lift again?

In Australia the 10-year government bond yield is nearing 3 per cent, significantly higher than the sub-2 per cent level traders—gripped by "cheap money forever" fever—priced in September 2016. Current 10-year yields are, however, still miles below the 5.5 per cent average since the Reserve Bank of Australia started targeting inflation in 1993.

Some of the best interest rate traders I know, almost all of whom have never experienced a proper inflation cycle, genuinely believe the RBA "will never hike again".

The problem with a supercilious central bank is the ensuing risk insouciance increases the probability of mistakes. A classic example was a speech given by the RBA's new head of financial stability this week.

According to this revisionist narrative the global financial crisis (GFC) "hasn't fundamentally changed the way we think about financial system stability". The RBA is evidently so sensitive to allegations it has failed to heed the lessons of the GFC—by blowing the mother of all bubbles with excessively cheap money—that it felt compelled to repeat the mantra the crisis had not altered its approach on five separate occasions in the speech. There are demonstrable flaws in this fiction.

First, the RBA never came close to anticipating the GFC. Its financial stability guru, Luci Ellis, published a paper in 2006 arguing"the most important lesson to draw from recent international experience is that a run-up in housing prices and debt need not be dangerous for the macroeconomy, was probably inevitable, and might even be desirable".

Ellis maintained that "the experience of Australia and the UK seems to suggest booms in housing price growth can subside without themselves bringing about a macroeconomic downturn". Two years later the 33 per cent drop in US house prices would trigger the deepest global recession since the great depression.

Second, the GFC necessitated a raft of policy responses that had never been seriously contemplated before, which have transformed the way we think about dealing with shocks and the unanticipated consequences. Contrary to the recommendations of the 1997 financial system inquiry, the Commonwealth guaranteed bank deposits and bank bonds for the first time. The RBA agreed to buy securitised mortgage-backed portfolios via its liquidity facilities, which it had never done, and Treasury independently acquired $16 billion of these loans in the first case of local "quantitative easing".

Banks borrowed more money on longer terms from the RBA than anyone previously envisioned, which led the RBA to create a new bail-out program called the committed liquidity facility. In emergencies banks can now tap over $200 billion of cash instantly at a cost of just 1.9 per cent that makes trading while insolvent an impossibility.

A central tenet of pre-GFC regulation--attributable to the 1997 Wallis Inquiry—was that taxpayers should never guarantee any private firm for fear of inducing "moral hazard". This is the "heads bankers win, tails taxpayers lose" dysfunction that emerges when governments insure downside risk. The RBA has since conceded that the crisis bail-outs unleashed unprecedented moral hazards, such as too-big-to-fail institutions, that require new mitigants.

The Australian Prudential Regulation Authority used to allow the major banks to leverage their equity 65 times when lending against housing because these assets were presumed to be nearly risk-free. Since the 2014 financial system inquiry APRA has been persuaded to deleverage the major banks' home loan books to merely (!) 40 times.

In 2013 the RBA was publicly dismissive of foreign regulators' efforts to contain credit growth via so-called macroprudential interventions to cool hot housing markets. One and a half years later APRA belatedly sought to cauterise the housing boom the RBA's 2012 and 2013 rate cuts precipitated with light-touch macroprudential jaw-boning.

Of course in 2017 the RBA has a different version of events. Apparently it has always seen "macroprudential policy as part and parcel of the financial stability framework". It turns out that "in 2014 the Australian regulators [presciently!] took the [rear-]view that risks were building in the residential housing market that warranted attention".

Actually, none of APRA's December 2014 announcements had any impact until well into 2015 (two years after the boom started) and they proved to be woefully inadequate. This column revealed, for example, that many banks had completely ignored APRA's minimum serviceability tests on home loans.

Good risk management requires intellectual honesty, which is missing in action among those overseeing the "wonder down under".


Read more: http://www.afr.com/personal-finance/the-rba-is-blowing-the-mother-of-all-bubbles-20170316-gv043y?&utm_source=social&utm_medium=twitter&utm_campaign=nc&eid=socialn:twi-14omn0055-optim-nnn:nonpaid-27/06/2014-social_traffic-all-organicpost-nnn-afr-o&campaign_code=nocode&promote_channel=social_twitter#ixzz4bXWSWyAu 
 

Don't Bank on it! Tips on financing business growth

Established businesses that are expanding rapidly face challenges from all sides. They may be winning large contracts with slow-paying major customers, recruiting at a fast pace, experiencing increased competition and market pressures, they may need to invest in production, marketing and development almost simultaneously and the management team may also be looking at new ventures and territories.

If this sounds like you, then you will be familiar with the sensation of having to keep all the plates spinning, while also professionalising your business – perhaps taking on greater financial or managerial clout. You might be recruiting at director-level, while also cementing existing relationships with everyone from new recruits to your oldest customers.

As a thriving, established business, you have already established your credentials but to maintain growth, the business requires more working capital investment.

Most growing mid-sized businesses with revenue of $10-30 million could really do with another $1 million to fund growth. But where do you find it?

Raising equity from business angels does not make sense for most established businesses. Few owners are happy to give up control of their business. Similarly, few businesses fit the criteria of business angels who look for unique companies with strong growth potential and solid prospects for a sale of the business in the medium term.

At the other end of the spectrum is your bank. Unfortunately, banks require real estate security so it will be impossible to obtain meaningful working capital finance from a bank without pledging a substantial amount of real estate. Business owners waste a lot of valuable time looking for an overdraft from their bank.

Filling the void, peer-to-peer business loans can provide an alternative source of finance. These sources of funding are thriving but are typically only able to provide up to $150k on an unsecured basis. The costs are quite high and the need to repay monthly over a 6 month term makes even less sense for growing businesses.

However, there is another key option: your existing sales ledger can also provide a valuable source of cashflow with larger facility sizes ($1m+) than available from unsecured lenders.

Historically, the only option was factoring which involves onerous contracts and the consent of your customers. An ancient model, literally as it was invented around 4,000 years ago in Mesopotamia, it doesn't work for most businesses.

Now there is a much better way - confidential invoice trading. Online invoice trading platforms connect businesses with a pool of investors who will advance funds against existing valid invoices. Instead of waiting out long payment periods, businesses trade their invoices and receive a percentage of their value – around 80% - with a minimal waiting time. All without involving your customers.

Online or alternative invoice finance improves on the traditional approach to invoice finance and factoring considerably.

It is possible to trade a single invoice, rather than surrendering a complete sales ledger to a provider. The technology platform keeps costs low, and decisions on creditworthiness are rapid. Generally, platforms approve businesses within a day, provided they can produce bank statements and accounts. Once invoices are validated funds can be made available straightaway. Costs come in at around one to three per cent, but over time this kind of finance becomes more cost-effective, with discounts for subsequent invoices.

Invoice finance is a useful means of improving cash flow and unlocking access to working capital. It is also particularly helpful for businesses considering export markets where payment cycles can be unpredictable particularly in the short term.

Check out the alternatives to banks. Speak to a finance broker or your accountant or enquire directly with providers that seem to fit your needs.

The hidden cost of applying for credit

Insights from the CPA's recent SME Finance roundtable in Melbourne

Recently, in a packed room of CPA members in Melbourne, I had the pleasure of participating as part of a panel discussion on the exciting changes sweeping the market for mid-market finance, and how new forms of finance are powering this engine room of our economy.

With over 50 different new online lenders, this new breed of financier are providing everything from quick turn-around loans to working capital finance and equipment finance, and branded as everything from ‘FinTech’ to ‘marketplace’ or ‘peer-to-peer’ lenders. The question on everyone’s lips as they arrived was ‘what do they have to offer to mid-sized businesses?’ 

What we easily agreed was that where online lenders really excel for the mid-market is in their ability to finance unconventional products in unconventional ways. For example, in providing confidential invoice trading facilities, InvoiceX is able to finance accounts receivable on an invoice-by-invoice basis, allowing clients to control their financing costs in real time. As a result, mid-market companies can avoid signing up to onerous contracts associated with invoice factoring where you would typically sign over all of your accounts receivable on a disclosed basis for a year or more.

However, as all of the participants quickly realised, even though the financing process is conducted through the internet more quickly and easily and leverages different forms of security and collateralisation than conventional lending, traditional barriers to access still remain – including the dreaded ‘credit check.’

But this credit check doesn’t need to be dreaded – with a couple of simple steps, you can avoid creating a negative credit picture with the credit bureaux. 

Under the Comprehensive Credit Reporting (CCR) reforms introduced in 2014, banks and other lenders are supposed to share positive credit data, but progress and uptake of positive reporting has been very slow. That’s a pity because it would give a fuller and fairer picture of the credit applicant’s financial health, enabling a positive assessment for good recent credit performance (for example no missed payments in the last 24 months) rather than potentially being denied credit because of a low-value default many years ago. As it stands today, only negative data is available.

It is not widely appreciated that shopping for credit can lead to what is referred to as a high ‘inquiry pattern’ by the credit bureaux. This can have a more detrimental impact on your credit score than their paying more than half of your accounts payable between 1-30 days late. 

Fortunately, through speaking with your advisors, you can ensure you’re avoiding this problem by selecting the right credit provider before applying. By engaging them early in the credit application process to build an accurate credit picture and approaching the most appropriate providers for a decision in principle before formally applying for finance, you can minimise the resultant hit to your credit score. 

With these easy steps you can protect your credit score and over the longer term improve it to access cheaper sources of finance.

Go on, have a chat with your advisor today and get your credit score lean and ready for summer business.

Have a plan to bridge short term cashflow dips

Every business should have a contingency plan to deal with an unexpected dip in cash flow. While simply having a business overdraft available provides some degree of short-term protection, it’s best to have an array of lifelines at your disposal. Also, we find that the overdraft gets used for everyday purposes rather than for unexpected problems.

Peer-to-peer financing is another clever route to addressing temporary dips in cash flow. Conventional peer-to-peer financing involves online companies lending to businesses from funds gathered through a pool of investors. These loans are usually quicker and more straightforward than conventional borrowing and there is no minimum amount, so they are perfect for topping up cash flow. Beware: some offer much better value than others: don't be taken in by headline rates, do some calculations or check with your accountant.

Another smart take on peer-to-peer financing is an online improvement on invoice ‘factoring’, whereby a business in need of cash sells its ledger to a bank or another conventional lender. The online providers in this area of peer-to-peer financing, which include InvoiceX, will buy (for 1.5-3% per month) individual invoices – allowing companies to easily draw specific, limited amounts – but avoid the hidden fees, long contracts and slow decision processes of traditional factoring providers. For working capital spikes, this is often a better ongoing solution than a short term loan which can cause more cashflow problems a few months later. Importantly, watch out for whether your customer needs to be notified.

Rapid growth in finance options for small-medium sized businesses

Interesting article in The Australian today covering a survey by eBroker which gives insights on the rapid growth in non-bank business lenders.

The question of regulation of business lenders is generally not well understood, we find. As neither an AFSL or credit licence is not required to lend to businesses, you cannot obtain one even if like us you would like one. The same applies to established non-bank lenders like Scottish Pacific. So there’s a bit more to it than APRA. 

In 2008, COAG agreed to a two phase reform process for the regulation of credit and that in Phase Two the Commonwealth would consider the need to change the definition of regulated credit, and to address practices and forms of contracts that were not subject to the Credit Act. After lengthy consultation, on 21 December 2012, the Minister for Financial Services and Superannuation, Bill Shorten, released for public consultation draft legislation to address perceived gaps in existing credit regulation and enforcement. In typical “Yes Minister” style, after many detailed contributions, the consultation was kicked into the long grass because another inquiry, the Financial Systems Inquiry, had started!

With an increasing focus on the problems for SMEs in accessing finance, hopefully this issue will rear its head again as we certainly need some standards to be applied. For example, effective interest rates (APR) which very few seem to understand.

Loans flood in for fintechs

THE AUSTRALIAN

JUNE 22, 2016

 

Michael Bennet

Extract:

Non-bank business lenders are receiving more than $1.1 billion of loan applications every month as awareness of new fintech operators and other alternative providers accelerates, according to a new survey.

Providing insight into the level of demand for loans outside traditional banks, the survey by online business lending aggregator eBroker found non-banks were attracting at least 11,676 loan applications a month, worth $1.13bn.

Non-banks are alternative lenders that don’t take deposits, sidestepping the need for a full banking licence and oversight by the Australian Prudential Regulation Authority.

The survey, conducted with marketing company WebBuzz, took place in early May and included the chief executives of 29 non-bank business lenders, including providers of unsecured cash flow loans, equipment finance, invoice discounting and trade finance.

Know your business credit score and be careful shopping for credit

As explained in a recent article on our blog, new credit reporting laws came into force on 12 March 2014, with major changes in what information can be included on a credit report and how that information can be handled. As a result, credit providers can access much more comprehensive information about you and your business.

There are 3 major suppliers of credit scores in Australia: Veda, Experian and Dunn & Bradstreet. Veda is the most commonly used provider and is now owned by Equifax (US). Veda holds data on more than 16.4 million credit-active individuals, 3.6 million on companies and businesses and 3.4 million on Sole Traders throughout Australia.

Your Veda Business Credit Score is a number ranging from -200 to 1200 that summarises how financially risky your business is. The score tells people how likely you are to pay your debts. The higher your Business Credit Score, the lower the risk of your business. The highest score, 1200 means that there is a 0.1% chance that you won’t pay all of your bills in full and on time over the next 12 months. The lowest score -200 means that there is a 94.1% chance that you won’t pay all of your bills in full and on time over the next 12 months.

When you apply for a Business Loan, lenders will use your Business Credit Score as one of their checks to determine whether to lend to your business. This is one of the quickest and most common checks a lender makes, so it is important for you to understand your score and improve it if necessary.

Veda uses complex algorithms and hundreds of data points to build up your Business Credit Score. These include whether you have paid your bills on time, how often you have applied for loans and in what space of time, the types and amounts of loans you have applied for, who the directors of your business are, and how long you have been in business, to name a few. The most important factor in your score is whether you have paid your bills in full and on time.

Anytime you apply for a loan, the lender will look at your credit report to see whether you have repaid your debts in the past. The more you shop for credit, the more this adversely affects your credit score. This is not generally understood by most business owners.

Therefore, it is wise to be careful about who you approach for finance. It is usually a good idea to speak to a well informed broker.

What could the Government do to fix our Broken Business Banks? And why does it really matter?

Insightful analysis by Alan Kohler in The Australian this weekend on what is holding business back and the negative effects on our economy. Sadly, our politicians seem to be disconnected from the reality of how to manage our economy.

How banks are running the economy

"A small business tax break is worthwhile perhaps, and likewise an RBA rate cut, and in each case it’s really all the government and the central bank can do."

Our view:

The Government could get involved investing modest sums on alternative finance platforms, like the UK Government did 3 years ago with powerful positive effects (and good returns on investment).

That would help overcome people's natural caution and skepticism. People tend to think that banks have some super-natural powers in deciding who is creditworthy. Overseas' experience makes it clear that they are simply expensive, bureaucratic building societies that have lost their way.

My father was a bank manager and retired when the computer took away his discretion. Bank managers in his days had real discretion and could support businesses with their growth plans. We need to re-invent banking by going back to why they came into existence in the first place. It had nothing to do with household mortgages which simply inflated the price of unproductive assets.

 

image.jpg
image.jpg

Here's a more detailed extract from Alan's article:

APRA, in line with global bank regulators, has also told them to increase their capital ratios, and since the system of risk-weighting means that only a quarter of the value of a real estate mortgage is counted against capital versus 100 per cent of a loan secured only against a business, that means all lending these days is more or less confined to mortgages.

It means the banks are basically not lending to those who don’t own a house or are already fully committed on their mortgages, and those who are building houses for investors.

So they are going elsewhere and paying 10-15 per cent more in interest than the banks would charge, except they’re not.

It means the divide between the haves and have-nots (a house, that is) has never been this great, and it’s also why this week’s rate cut by the Reserve Bank will make no difference and why the government’s efforts in the budget to help small businesses and middle income earners will only scratch the surface.

Banks actually run the economy by both creating money and circulating it, not the RBA or the government, and these days banks are only serving those who have equity in real estate.

According to economist Saul Eslake, home ownership rates among households headed by people aged 25 to 55 have dropped by an average of 9 per cent since 1991.

Most dramatically, the rate of home ownership among 25-34 year olds has fallen from 61 per cent in 1981 to 47 per cent in the latest census.

That is a huge social change: in one generation the number of families starting out and having children who also own their own home has dropped from almost two-thirds to less than half, and in the past 10 years the decline is accelerating.

It means the number of young people able to get a bank loan to start or expand a business, or to get a car loan or personal loan for anything less than 15 per cent interest, has also fallen significantly.

And a lot of that change is caused by the real estate market distortion inherent in negative gearing and the capital gains tax discount, which rewards highly geared property investors at the expense of owner-occupiers, who are in turn paying higher taxes than they otherwise would be in order to fund the subsidy to property investors.

So the combination of high house prices caused, in part, by negative gearing and the capital gains discount, with the transformation of banks into little more than building societies that lend almost exclusively against real estate, is the reason growth is weak.

A small business tax break is worthwhile perhaps, and likewise an RBA rate cut, and in each case it’s really all the government and the central bank can do.

But what’s really crimping entrepreneurship and growth is the post-GFC change to banking.

It means business people looking to expand have to come to Shylocks like your correspondent.

Most don’t bother.

A Budget for Jobs & Growth is welcome but where do you find the finance to grow?

The Budget this week re-emphasised the critical importance of our Small-Medium Businesses (SMBs) in generating growth. We strongly believe that the main missing ingredient is a market which enables SMBs to access finance to grow on a reliable and timely basis.

The market for alternative finance in Australia is on track to grow to over $95 billion over the next 5 years and is changing at a rapid pace. Our confidential, flexible working capital product is unique in Australia and we are seeing very strong demand from growing businesses.

This is timely as bank lending to SMBs has decreased for the first time since the GFC (source: RBA): 

  • In Q4 2015, business credit for facilities less than $2 million decreased from $260.7bn to $260.6bn in a quarter which usually demands increased business finance
     
  • In 2015, only 13% of business loans were made to SMBs, compared to around 50% in the 1990s
     
  • Property loans since the GFC have grown by $538.7bn (+54%) while business lending for all sizes of business has increased by just $72.5bn (+9%)

One symptom of the scale of this problem is that the ATO is currently owed over $32bn in overdue tax, mostly from small businesses. The ATO has had no choice but to agree instalment payment plans with over 800,000 businesses in Australia in 2014-15 and this year is no different. In the first six months of 2015-16, more than 420,000 payment plans have been granted.

Without the finance to grow, fiddling with tax rates and allowances makes only a small difference when it comes to getting our economy on a solid long term growth trend.

What's a small business credit score?

What's a small business credit score?

Like your personal credit, your business has its own scores too—and those scores paint a different picture of your business’s ability to repay a debt. Both types of scores, personal and business, can be taken into account by lenders to qualify you for financing, loans, and business credit cards. Because your business credit scores have such an effect on your financial health, it’s important to understand what they mean.

Quick tips to boost your business’ credit rating and some ideas on how invoice trading solves the cashflow mismatch

A business with a poor credit rating can find it difficult to access loans and other financial services. That’s why we have analysed some credit agency models and found a few simple ways to boost your score, and avoid unnecessary exclusion.

Be careful about shopping around for credit

Business owners are generally not aware that shopping around for credit can have quite a negative effect on your credit score. Try to get good advice before applying for credit. Read this article for more information.

Improve the way you file with ASIC and prepare accounts

  1. File your annual return on time – being prompt won’t necessarily boost your rating, but being late can cause problems.

  2. Prepare your accounts on time, Use accountancy software like Xero or MYOB to keep everything in check, and work with your accountant to prepare everything you need in good time. Keeping everything on-line makes this much easier.

  3. Use a reputable accountant. This doesn’t mean you need to go to one of the ‘big 4′ professional services firms like. A well-practiced local accountant who is an ACA or CPA is just as good. Annual accounts from a trustworthy source will give your business real legitimacy and boost your credit rating.

Avoid complicated corporate structures

Keeping your business’ structure simple (e.g. a proprietary limited company) makes it easier for lenders to understand and assess – instantly improving your credit rating. Too many subsidiaries or an unclear ownership structure are warning signs to potential lenders. More transparency and a clear corporate framework will give you a better credit score.

Stability at the top

If directors and board members are seen to be chopping and changing, it’s an instant sign for those looking in that trouble is brewing within a business. Try to avoid this instability as best as you can, as it undermines the rest of your business. Pick your partners for the long run and stay transparent on who controls the company. A strong leadership instills confidence, and will improve your credit rating.

Keep your net assets positive, separate business from lifestyle expenses

Make sure your total assets always outstrips your total liabilities. Some lenders will outright refuse to lend to any business that has negative net assets. This might affect those owners who use their controlled companies to pay for their lifestyle expenses. Sole traders or entrepreneurs often don’t separate their personal expenses from their company expenses. Whilst this pattern is quite typical for SMEs, such businesses will show very low or even negative net assets, with the slightest of operating margins. It’s up to you how you run your business, but beware that this behaviour will have an adverse impact on your credit score and your ability to access credit.

Keep on top of your cash flow

It’s vital to maintain a healthy balance between your current assets, payables and outstanding liabilities. Poor management of working capital can leave your business heavily exposed to its incoming payments. Don’t be afraid to negotiate credit terms with your suppliers and your customers. You can also use invoice finance to improve your cash position – the most quick and flexible option is InvoiceX of course.

It’s also important to check who you’re dealing with – do they pay on time, or do they pay late? Ask other business owners who have dealt with your prospective customer about their record. Credit check your customers, and ask to be paid promptly. Don’t accept unfair or unusually long payment terms, be prepared to walk away if these are forced upon you – it’s no good to see your business fail because of tight cash flow when you have a full order book.

Court Judgements

Court judgements are registered against your business when your creditor has gone to court to force you to pay them and the judge has ruled in their favour. They are a fast-track to a poor credit rating – either pay them off or fight them vigorously, don’t let them fester. The more judgements you have the lower your credit score. Less than one percent of businesses in Australia have outstanding court judgements, so those that do are in a tiny minority that will suffer. Deal with them as quickly as you can.

Security interests and charges? These actually DON’T affect your credit rating.

Your credit score is impacted by the amount of debt you carry as a business, but not by what kind of security you have provided to your creditors. For example, granting a General Security Deed (contract by which you pledge all of your business assets to your creditor) doesn’t in itself impact your credit score, it just makes it necessary for any new creditor to agree with your existing creditor on how your assets will be divided up if your business should fail. If a lender wants to provide you with credit, but has to get consent from your existing creditor, don’t be afraid to ask for it. Banks in Australia are expected to ensure that the consent is provided in reasonable time and even if consent is refused, they can’t change the terms of your current lending agreement. So asking for consent won’t damage your credit rating, or your ability to get credit in the future.

Most of the time when a business is refused credit (or quoted an expensive price) it’s not the result of specific information that looks bad, it’s actually the result of a lack of information. By sharing more information about your business online, you’ll most likely find yourself a much more attractive prospective borrower.

Small business credit - what happened to the Phase 2 credit protection reforms agreed at COAG in 2008?

In 2008, the Council of Australian Governments (COAG) agreed to a two phase reform process for the regulation of credit and that in Phase Two the Commonwealth would consider the need to change the definition of regulated credit, and to address practices and forms of contracts that were not subject to the Credit Act.

After lengthy consultation, on 21 December 2012, the Minister for Financial Services and Superannuation, Bill Shorten, released for public consultation draft legislation to address perceived gaps in existing credit regulation and enforcement. 

"A review of the provision of credit to small business has shown that, while the majority of small business lenders and brokers provide a valuable service, some practices exist that result in high financial losses to small business borrowers. The draft legislation seeks to strengthen protections for small business borrowers, particular where the loan in secured against the family home, including by extending the Australian Securities and Investments Commission’s supervision and enforcement ability.

While difficult to quantify the costs and benefits, some lenders will incur additional one-off implementation costs. Most lenders will not incur these costs as they already comply (or can readily comply) with the proposed changes.  Borrowers, particularly those which have exhausted mainstream alternatives, may find it more difficult and costly to obtain credit but will have access to redress if misconduct occurs.

The Regulation Impact Statement was prepared by the Treasury and assessed as adequate by the Office of Best Practice Regulation."


Treasury Update, October 2014 (K&L Gates)

Due to the government moratorium on legislation awaiting the findings of the Financial System Inquiry, Treasury is not currently pursuing Phase 2 of the credit reforms concerning small business and investment lending.


Regulation Impact Statement: Small business credit, January 2013 

This Regulatory Impact Statement (RIS) considers whether credit provided to small business should be regulated, as part of the National Credit Reforms. 

Executive Summary 

The provision of credit to small businesses can assist them to meet their start up, expansion or ongoing business cost requirements. A review of the sector suggests that the majority of small business lenders and brokers operate in a way that provides a valuable service to their borrowers. However, some practices exist in the industry that can result in high levels of financial losses to individual small business borrowers.

These practices primarily occur in relation to ‘distressed’ small business borrowers, that is, borrowers who are in a position where they are seeking funds urgently to keep their business afloat (rather than, for example, wanting credit to expand their business). The most common scenario is where the business has defaulted in the repayments under an existing loan, and that lender has either commenced enforcement action or is threatening to do so.

The current legislative framework does not adequately address these practices. The possibility of enforcement activity by the Australian Securities and Investments Commission (ASIC) that would comprehensively address is subject to limitations including a combination of regulatory and enforcement gaps and the prohibitive cost and inefficiency of enforcement action. There are also substantial barriers to recovering compensable losses, both in actions taken by ASIC and by consumers in their own right.

It is recognised that small businesses cannot be absolved of all responsibility for their financial and business decisions, and a balance should be reached between protecting the most vulnerable and allowing the market to price risk. To achieve this balance, it is proposed to introduce targeted regulation which will minimise as far as possible the impact on lenders who are not engaging in these practices.

Targeted regulation would be introduced through a negative licensing scheme, improved disclosure requirements, universal access to external dispute resolution (EDR) and the introduction of a remedy for asset-stripping conduct. This approach is influenced by the extent to which lenders and brokers are largely already members of an EDR scheme and also hold an Australian credit licence (limiting the impact on these persons).

Were this not the case a different approach would need to be considered. These reforms will improve ASIC’s supervision and enforcement ability and give ASIC the ability to exclude entities from the market in the event of severe misconduct. They will also assist consumers by giving them access to more affordable dispute resolution, and result in improved understanding of the loan contract in some cases. 

The reforms are not expected to comprehensively address this type of misconduct in the small business lending market, but are expected to have a deterrent effect on some lenders. Borrowers will have improved access to compensation if misconduct occurs, and ASIC will have improved ability to identify and exclude lenders where, for example, they demonstrate a continued reluctance to comply with the law. 

It is difficult to quantify the cost to industry and the benefits to borrowers (and there is difficulty in observing and quantifying any flow on consequences), and it is not possible to state definitively whether or not this reform would have a net benefit in monetary terms. Costs to all small business lenders will include one off implementation costs to change disclosure procedures and modify other practices to address regulatory risk. Most lenders would not need to make substantial changes as they are already complying with, or are in a position to readily comply with the reforms. Nevertheless, the reforms propose addressing this conduct in a way that may have impacts on all borrowers, primarily through the risk of higher costs or some lenders exiting the market. 

Overall, it is considered the reforms balance the need to protect borrowers while minimising as far as possible the costs to industry, and have the potential to reduce significant losses to individual businesses. 
 

Our approach to the lack of regulation in SME finance

InvoiceX has been built by experienced founders who are passionate about providing a better deal for ambitious businesses and investors.

As is the case overseas, invoice finance in Australia falls under asset based financing, which is not currently an activity regulated by ASIC (Class Order [CO 04/239]). We would welcome regulation but you cannot choose to be regulated, as our regulatory advisers have pointed out.

More broadly, business finance is Australia is hardly regulated with very high level ASIC protections. A January 2013 government review confirmed this and recommended the following course:

"Targeted regulation would be introduced through a negative licensing scheme, improved disclosure requirements, universal access to external dispute resolution (EDR) and the introduction of a remedy for asset-stripping conduct."

InvoiceX does not invest any capital into invoices itself or on behalf of any third parties. Unusually, our founders' investment vehicles invest in every trade alongside our other investors on the same terms. InvoiceX does not take client deposits or give any investment advice. InvoiceX only accepts Sophisticated Investors on its platform.

InvoiceX is the first and only SME finance provider of any type in Australia to reveal its loan book in full. We will continue to do this as we develop. We aim to provide the best terms in Australia for invoice finance.

Finance has been offered to SMEs on unfair terms for too long. Banks over-collateralise loans based on real estate, reduce or remove overdraft limits with little or no notice. Some non-bank lenders lock SMEs into onerous contracts, especially in invoice finance but also quite a number of emerging online lenders that promise quick decisions at very high, unstated interest rates with penal early repayment terms.

This needs to change. We do not lock our customers into contracts. Businesses can quickly raise finance on just one invoice with no set-up fees on fair and transparent terms and are under no obligation to continue using InvoiceX afterwards. And it is a confidential service which does not involve the SME's customer.

Voluntarily at the outset, we set up a not-for-profit Special Purpose Vehicle to handle all transactions between Buyers (investors) and Sellers (SMEs) on our platform. The day-to-day management of this SPV in terms of settling trades and real-time accounting and reconciliations is outsourced to BDO, a Top 5 international accounting firm. Furthermore, we require regular internal auditing of the SPV as an additional layer of protection. All of this means that if InvoiceX ran into any difficulties, there is a robust system in place to handle the winding down of the platform or effect a transfer of ownership.

We voluntarily pay to be a member of the Credit and Investments Ombudsman, a free, independent and impartial external dispute resolution (EDR) service for our customers. It is approved by ASIC with over 20,000 financial services members in Australia.

We voluntarily maintain professional indemnity insurance although we do not provide financial advice.

We are supporters of significant efforts being made to create the Australian equivalent of the UK Peer-to-Peer Finance Association. This body would require members to operate by a strict set of rules in order to promote high standards of conduct and consumer protection.

We are members of Fintech Australia, a national not-for-profit organisation with a vision to make Australia the number one market for FinTech in Asia. Its key objectives are to support the Australian FinTech community, build awareness and trust in FinTech startups and to advocate for better policy on behalf of our members.

Finally, our two founders have worked in regulated industries throughout their 25-30 year careers, holding significant influence functions. We firmly believe in transparency, fairness and high standards of conduct.

Please share this with people if you think this is helpful.

Why does confidential invoice trading make sense?

Through our revolutionary Match Maker Trading Platform™, we offer our customers valuable benefits that are not available with other financing options.

BANK OVERDRAFTS DON'T FINANCE REVENUE GROWTH - THEY LOOK BACKWARDS NOT FORWARDS AND YOU NEED REAL ESTATE

1. Overdraft limits are typically set based on your fixed assets including personal real estate

2. For many firms the biggest balance sheet assets are the amounts due from their customers (invoices) - these are not fixed assets, so you can’t raise an overdraft against them

3. Increasing your overdraft is often mind-blowingly difficult requiring lengthy negotiations with your bank with accountant's reports

4. With a tight credit environment banks have been reducing overdraft facilities to businesses, especially small-medium sized businesses

5. Overdrafts often come with high and unexpected fees, which you only discover when you need the overdraft most

TRADITIONAL FACTORING AND INVOICE FINANCE PRODUCTS LOCK BUSINESSES INTO A CAPTIVE RELATIONSHIP

1. All of your debtors: customers must enter into whole turnover invoice financing arrangements, not single invoice finance, to avoid penal rates

2. Lack of confidentiality: the finance provider takes control of all of your customer collections

2. Expensive: ongoing monthly minimum services fees, high arrangement fees, unclear terms, lower availability of finance than advertised due to concentration limits and lack of co-operation by debtors

3. Unfair contracts: traditional debtor finance contracts usually involve contractual lock-ins with long notice periods which in many cases make it exceptionally difficult for the customer to terminate the contract 

4. Unreliable: credit lines can reduce with no notice at the whim of the funding provider

6. Clunky: often lacking in innovation, traditional products tend to be inflexible to your needs

INVOICEX BRIDGES THE GAP

1. Sell invoices confidentially as often or as little as you want, only paying transparent transaction fees on each invoice sold

2. Sell invoices in minutes to sophisticated investors using our Match Maker Trading Platform™: they buy your invoices and we ensure that funding is advanced to you next day

3. You deal with customer collections, not us

4. Obtain best pricing for the invoices that slow your business down, rather than unilaterally across all your debtor book

5. Access funds almost no matter what industry you are in

6. No need for blanket security charges over all company assets - raise cash, not debt

Why Government needs to get involved in fixing business lending

Interesting views from a notable economist, Joseph Stiglizt, in promoting his book, Freefall: 

I believe that markets lie at the heart of every successful economy but that markets do not work well on their own. In this sense, I'm in the tradition of the celebrated British economist John Maynard Keynes, whose influence towers over the study of modern economics.

Government needs to play a role, and not just in rescuing the economy when markets fail and in regulating markets to prevent the kinds of failures we have just experienced. Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.

We should take this moment as one of reckoning and reflection, of thinking about what kind of society we would like to have, and ask ourselves: are we creating an economy that is helping us achieve those aspirations?

We now have the opportunity to create a new financial system that will do what human beings need a financial system to do; to create a new economic system that will create meaningful jobs, decent work for all those who want it, one in which the divide between the 'haves' and 'have-nots' is narrowing, rather than widening; and, most importantly of all, to create a new society in which each individual is able to fulfill his aspirations and live up to his potential, in which we have created citizens who live up to shared ideals and values, in which we have created a community that treats our planet with the respect that in the long run it will surely demand. These are the opportunities. The real danger now is that we will not seize them. 

 

image.jpg

CBA - why has non-mining capex not picked up? No reference to obstacles in raising finance to grow

For the past few years, economists and policymakers have assumed that a lift in non-mining business investment was forthcoming. A trawl through RBA documents and speeches shows that policy officials have been anticipating a lift in non-mining investment for a few years. And yet despite incredibly low interest rates and a significantly lower AUD, the lift remains elusive. It has felt a lot like waiting for Godot. Fortunately, however, there has been a greater than expected pickup in services activity which has generated a fall in the unemployment rate despite weak non-mining capex. This has supported the economy and employment growth over the past two years. But for the productive capacity of the economy to lift over the longer term, a lift in business investment outside of the resources sector.

image.jpg

In this note we ask the question why non-mining business investment has been so weak.

image.jpg

…it may be the case that expectations of future demand are too low to justify a lift in investment…

Capacity utilisation, as measured in the NAB Business survey, implies that throughout most of the past few years capacity utilisation in Australia has been below its long run average. This goes some way to explaining why business investment has been weak. And also why inflation has been low…

Australia’s manufacturing industry suffered greatly because of the first and second stages of the mining boom…

The problem, of course, for the manufacturing sector is that when the currency depreciates to more ‘normal’ levels, it’s not that easy to crank up manufacturing investment and output… the high fixed cost component of manufacturing means for firms that are forced to close, recommencing operations is often not an option…

[ScreenHunter_11560 Feb. 17 10.56]http://www.macrobusiness.com.au/2016/02/the-illusive-future-boom-in-non-mining-investment/screenhunter_11560-feb-17-10-56/

The hurdle rate is too high. Firms generally use Discounted Cash Flow (DCF) analysis (or a version of it) to estimate the attractiveness of discretionary capital investment. But a range of evidence indicates that hurdle rates are often much higher than the weighted average cost of capital (WACC)…

The ‘stickiness’ of business hurdle rates is in stark contracts to valuation methods employed by property investors…The fall in borrowing rates over the past few years gave rise to a big increase in investor activity in the housing market. Dwelling prices rose quite sharply as interest rates fell…

[ScreenHunter_11561 Feb. 17 10.59]http://www.macrobusiness.com.au/2016/02/the-illusive-future-boom-in-non-mining-investment/screenhunter_11561-feb-17-10-59/

Monetary policy has been overburdened for too long… Indeed, record low interest rates have been assumed to be the panacea to get non-mining investment going. But monetary policy can only do so much. The interest rate lever can help smooth out the business cycle. But it cannot do anything to change the more entrenched and structural impediments to growth which are primarily related to the inefficient allocation of resources.

In Australia, for example, policies should be developed that encourage and channel capital into projects that improve the productive capacity of the economy over the long run. Establishing an efficient taxation system that incentivises innovation and productive investment is one area that could help lift business investment…

Public infrastructure investment is also important. For example, greater investment in transport infrastructure will improve the productive capacity of the economy. And it supports private investment rather than crowding it out. At a time when the yield curve is at historic lows, there must be no shortage of viable projects where the costs of finance is less than the social rate of return…

[ScreenHunter_11562 Feb. 17 11.02]http://www.macrobusiness.com.au/2016/02/the-illusive-future-boom-in-non-mining-investment/screenhunter_11562-feb-17-11-02/

Australian investors love dividends! And the pressure on companies to maintain or lift dividends in a low interest rate environment has intensified because deposit rates are so low. There is a risk that the pressure on companies to increase dividends has been paid for by cutting back on capital investment…

[ScreenHunter_11563 Feb. 17 11.03]http://www.macrobusiness.com.au/2016/02/the-illusive-future-boom-in-non-mining-investment/screenhunter_11563-feb-17-11-03/

What can we expect in 2016?.. the leading indicators suggest that non-mining business investment growth is likely to remain weak over 2016. The latest capex survey suggested that non-mining capex would fall over 2015/16… [although] there are limitations with the capex survey…

Notwithstanding the soft capex survey, the latest credit aggregates offer a glimmer of hope on the outlook for non-mining investment. Business credit growth has been lifting which is an early sign of a lift in capital expenditure…

Why is funding for small businesses so severely constrained?

Most small businesses turn to bank financing to fund their operations. However, lending by banks is often limited because understanding small businesses requires more time and expertise than the more standardized consumer business.

At the same time, the traditional relationship-based corporate banking model is costly to operate in dealing with small business, given the smaller loan size. Further, information asymmetry as a result of the lack of supporting financial information infrastructure limits the ability to lend. Small businesses often lack the required data, such as a history of audited statements for a bank to appropriately assess its cash flow situation.

More generally, the high intrinsic risk of SMEs often exceeds banks’ risk appetite. This hesitation is further amplified by regulation, such as Basel III, which imposes higher capital requirements for (riskier) small business loans, compared to loans extended to states or home owners.

Over past years, banks have thus further decreased their lending exposure to SMEs while the costs of borrowing have increased for SMEs. In the US, SME loans as a percentage of all bank business loans fell from 35% to 24%. In the Eurozone, borrowing costs for SMEs as spread over larger loans increased by 150%.

The Future of FinTech: A Paradigm Shift in Small Business Finance, October 2015