SME lending

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.

"We are a young country that has to use its capital smarter" - Don Argus

Some wise words from one of our most experienced business people. Lending to small-medium sized businesses is shrinking at a time where we need them to grow.

There needs to be a real focus on what is constraining growth and the answer is not found talking to economists, we think. Any discussion with the management of a growing business turns to working capital very quickly. No growth finance, no growth.

What keeps former NAB boss and BHP chairman Don Argus up at night?

One of the most experienced executives in the country, Don Argus has concerns about lending standards. Nic Walker

by Stewart Oldfield

What scares the "hell out of" Don Argus, a former chief executive of National Australia Bank and former chairman of BHP Billiton?

Iron ore prices? Interest rate rigging scandals? No. It is interest-only home loans.

"It scares the hell out of me – the size of the debt people are taking on without principal repayments," he says.

The famously forthright executive says banks giving million-dollar home loans to young people had lost perspective. "It used to be very difficult to get a home loan in the old regulated banking environment," he says. "Now it's like a commodity."

According to data compiled by the Australian Prudential Regulation Authority, interest-only mortgage loan approvals peaked at a record 46 per cent of total mortgage loan approvals in the June quarter of last year. 

Since then, their proportion of total mortgage approvals has reduced to 37 per cent, still much higher than the level of five years earlier.

NEGATIVE GEARING

The Reserve Bank said last month that further falls were possible in the proportion of interest-only loans being written as some banks continued to phase in the tighter lending standards being demanded by regulators.

"Some further falls in the share of high-LVR [loan-to-value ratio] lending and interest-only lending in the period ahead could be expected," the RBA says.

Interest-only loans have been particularly popular among those buying homes for investment purposes. Such loans can allow high-income earners to maximise the benefits of negative gearing.

Argus' views on interest-only loans are taken seriously in banking circles because he built his career around being rigorous on lending standards in the late 1980s and early '90s, avoiding the disastrous commercial loan exposures that hobbled his peers.

He was appointed head of NAB's credit bureau in 1986 and took over the top job from Nobby Clarke in October 1990,  remaining in the role until 1999.

He became chairman of what was then called BHP Limited from 1999 until 2010, when he oversaw a tremendous period of expansion as the company reaped the rewards of the resources boom.

INDEBTED CONSUMERS

The level of indebtedness among Australian consumers and the government is a drag on economic growth, according to Argus. This is already being seen as stimulatory monetary policies around the world fail to inspire consumer spending.

 He says Australian consumers are among the most indebted in the developed world and the governments that have been  embracing interest-only loans will leave a terrible legacy for future generations.

Argus says a correction in house prices is inevitable, starting with the apartment market. But he is not predicting a severe credit cycle as last seen in the early '90s when corporate losses and inflated asset values brought several Australian banks to their knees.

"It may not be as severe because bankers these days do understand that free cash flow is important when assessing the risk profile of corporates," he says. 

"But it remains to be seen how their risk-assessment processes stand up when interest rates begin to rise again for small business and consumer customers."

 Argus says a target of a 15 per cent return on equity for banks could prove difficult to sustain. "In today's diminishing return world, one should not forget that our large bank balance sheets rely on funding from offshore markets and this can become expensive at maturity if overseas banks falter in the wake of slower economic growth."

SPOOKED

That said, he believes it is prudent for banks around the world to rely more on tier 1 capital rather than debt instruments such as hybrids, which could be questionable in terms of tax deductibility and subordinated to other forms of funding. 

"You can never have enough equity capital," he says.

Australian banks have been strengthening their capital positions in recent years in anticipation of APRA's measures to address the financial system inquiry's recommendation for their capital ratios to be "unquestionably strong" by international standards. The big banks raised $5 billion of common equity over the past six months. This increased their common equity tier 1 capital to about 10 per cent of risk-weighted assets as of December 2015, 1.25 percentage points higher than a year ago.

The capital positions of some are also being supported by asset sales.

Argus says Australian banks have an important advantage over overseas ones, particularly in the US, given their relatively high level of non-interest-bearing and fixed‑term deposits. He attributes this to Australian consumers still seeing banks as safe havens compared with some of the collapses that have occurred offshore.

He has previously warned that a royal commission into banking conduct in Australia could spook foreign lenders at a time when domestic banks depended enormously on offshore lending.

GEOGRAPHICAL ADVANTAGE

He highlights the strengths of several Australian-listed companies. Macquarie Bank's fee-based business model, he says, is "probably as good an investment banking model that you will see".

BlueScope Steel has successfully reinvented its business model, while Amcor has demonstrated a record of consistent wealth creation. He also applauds Transurban's initiative in taking new infrastructure proposals to the Victorian government.

Argus says Australia's geographical position on the doorstep of Asia ensures the nation has a magnificent future as long as we take full advantage of its strengths, for instance in primary industry, education and health. 

"We are a young country that has to use its capital smarter," he says.

However, he is critical of the performance of governments since 2007. "We have managed to record a series of budget deficits, which leaves us with public debt, which will get the attention of the rating agencies, and the investments undertaken have hardly been productive.

"Going forward, if one thinks that one can ramp up GDP growth by spending billions on non-productive initiatives and promising unfunded activity, which only add to our fragile financial position, then we are in for some rough times ahead."


Read more: http://www.afr.com/personal-finance/shares/what-keeps-former-nab-boss-and-bhp-chairman-don-argus-up-at-night-20160420-goayvr#ixzz49Aqrvks9 
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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.

 

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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.

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 invoice trading is so different to factoring and so much better

CONFIDENTIAL FLEXIBILITY

We view long dated invoices as an asset you can leverage to provide cashflow to grow your business

In Australia many ambitious businesses can’t reach their potential because banks won’t fund them without real estate backing. Where do you go if you have no more equity in your house?

Many of Australia's most promising small to medium sized companies have large slow-paying customers: Government entities, ASX listed companies, large multi-national corporations, educational and healthcare institutions, etc.  You know they are going to pay: it’s just going to take a while, 45, 60, 90 days…

InvoiceX has the only solution of its kind in Australia. Invoice trading, or single invoice finance as its sometimes described, has now caught up with the new sharing economy, which has introduced the likes of Uber and AirBnB. We match sophisticated investor funds with growing Australian companies on the best terms possible, ensuring the best possible deal for both parties.    

Uniquely, the funding is confidential and only needs to be used on an as-needed basis. Unlike traditional factoring, the funding is totally undisclosed, the terms are fair and transparent, it’s all done online at speeds that would embarrass your bank.

You are in control to trade invoices when you want, on your terms, single invoices or bundles of invoices.

For ambitious businesses this is a powerful tool, which turbo-charges growth.

Our track record speaks for itself. We have many happy customers Australia-wide who swear by our revolutionary model. Confidential invoice trading works.

SIMPLY, IT’S THE SMART WAY TO GROW. 

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 SME lending doesn't make sense for our banks, according to the RBA

It's time that our banks started to be upfront about lending to small businesses. It doesn't make any sense for them and they only do it to access cheap deposits.

The Reserve Bank of Australia issued an interesting report in October 2015, the main focus being on leveling the playing field in residential mortgages between the Big 5 banks and the smaller ones.

However, it also succinctly highlighted why SME lending is so unattractive for our banks. They need 4 times more of their own capital to lend to a small business than the amount required to advance a residential mortgage loan. Add in the costs of dealing with the complexity of business lending and it is clear why it is such an unattractive business for them.

And with the looming regulatory capital changes ahead, SME lending is going to become a lot less attractive: up to 10 times less in fact.

Thankfully, the Alternative Finance market is now developing but, if not actively supported by our policy-makers,  it will take too much time to plug the gap that really needs filling now, not in 5 years time.

Let's hope Canberra is on to this.

 

SME finance in Australia is changing for the better thanks to P2P/marketplace lending

Oz P2P Lender Releases Loan Book

By Guglielmo de Stefano on 2nd February 2016
 

Invoice trading platform InvoiceX publishes its loan book as part of its plan to boost transparency.

Australian online invoice trading platform InvoiceX today announced the publication of its loan book, containing tons of data on more than $6.5 million of invoice trades from November 20th 2014 – when the platform launched – to 31 December 2015. According to the data, the company is on track to trade over $50 million worth of invoices in 2016.

Founded by Dermot Crean and Steve Yannarakis, the company is strongly placed to help small and medium enterprises (regardless of their business sector) to deal with working capital pressures. Its primary product – the Match Maker Trading Platform – rapidly matches investors with businesses, optimising the deal for both parties. InvoiceX assures the total absence of set-up fees and a straightforward application process. The company aims to provide a cash advance – up to 85% of the Face Value of an invoice – within 24 hours.

Dermot Crean, co-founder and director of InvoiceX, commented:

“Greater transparency is key to taking P2P lending mainstream, both for businesses and consumer loans. It is our hope that release of this data will prompt other P2P lenders to take the same action. We want to ensure that all business owners in Australia who are eager to grow have access to transparent and fair finance which puts the rights of borrowers at the centre of the lending process.”

Since inception, InvoiceX has facilitated 201 trades for SMEs with an average trade face value of $33,098, an average discount fee of 1.2 per cent per calendar month and an average settlement period of 35 days. The platform is keen on highlighting the differences between its business model and a normal factoring provider. Traditional factoring involves long lock-in periods, much higher costs and the losing of control of sales ledgers and collections. Conversely, InvoiceX’s product is totally confidential, with no lock-ins and a good deal of flexibility.

According to Dermot, the release of this data is indicative of a maturing P2P lending market in Australia. He said:

“The public release of this lending data will allow businesses to make easy comparisons between P2P lenders, and also directly with traditional finance options such as term loans and mortgages. […] Greater transparency is key to taking P2P lending mainstream, both for businesses and consumer loans. It is our hope that release of this data will prompt other P2P lenders to take the same action.”

It’s widely acknowledged that transparency is a key pillar of the Alternative Finance Space – essential to ensuring the sustainable growth of the asset class and to demonstrating that alternative finance platforms are behaving responsibly.

InvoiceX claims to be the first P2P Australasian platform to publish its loan book. “It's great to be the first to do this ever in Australian SME finance,” said Dermot. RateSetter Australia, following in the footsteps of its UK-based progenitor, uploaded its complete loan book online last October – although this resource is updated on a quarterly basis. On a global scale, many players have already disclosed their data, including the likes of ZopaFunding CircleRateSetter and MarketInvoice in the UK.

Aside from increasing the public’s opinion of the sector, data is critical also from a practical perspective, allowing for the construction of indices, such as the The Liberum AltFi Returns Index (LARI), which will likely come to form an essential component in the maturation of the sector.

AltFi Data today added an Australasian section to its Resources page, providing a link to the InvoiceX loan book, which is accessible here. We suspect that InvoiceX may have company in the Australasian section before long.

Interesting to contrast UK and US SME growth initiatives with ours - we need to take much bolder steps

tiny-steps
tiny-steps

UK Budget 2015

  • Corporation tax rate falling from 20% to 18% by 2020
  • Banks compelled to refer declined customers to alternative finance providers and share information
  • Government-backed Business Bank to facilitate up to $20bn of finance by 2019
  • $400k annual investment allowance
  • Enterprise Zones

US Small Business Administration

Created in 1953 as an independent agency of the federal government, its number one strategic goal is “growing businesses and creating jobs” and its second goal is to “serve as the voice for small business”.

The major tools employed by the SBA are a range of financial assistance programs for small businesses that may have trouble qualifying for a traditional bank loan. The biggest program is the 7(a) Loan Guarantee which guarantees as much as 85 per cent of loans up to $150k and 75 per cent of loans of more than $150k. The maximum loan SBA guarantees is $5m.

Loan terms can last up to 25 years for real estate, up to 10 years for equipment and up to seven years for working capital. The SBA limits the maximum interest rate banks can charge to no more than 2.75 per cent on top of the Prime Rate (currently 3.25 per cent). In addition, the SBA charges a guarantee fee ranging between 2 per cent and 3.75 per cent. So all up a small business would pay between 7.5 per cent and 9.5 per cent.

In 2015 the SBA approved 63,461 7(a) loans for a sum of $23.58b at an average of $371k. The total of all loans guaranteed was $111.769b with a bad debt rate (called charged off) of less than 1 per cent.

Australia

Budget 2015

We want to ensure Australia is the best place to start and grow a business. The best way to create jobs is to build a strong, prosperous economy that encourages business confidence:

  • Accelerated depreciation allowance of $20k (this is just a timing difference in when tax is payable and where do you find the capital anyway?)
  • Company tax rate for businesses with up to $2m of turnover will be reduced by 1.5 percentage points to 28.5 per cent

National Innovation and Science Agenda, December 2015

  • Tax breaks for angel investors
    The government will offer tax incentives for investors in startups including a 20% tax offset based on the amount of their investment capped at A$200,000 per investor, per year. There will also be a 10 year capital gains tax exemption for investments held for three years. This will apply to businesses have expenditure less than $1 million and income less than $200,000 in the previous income year.
  • Equity crowdfunding
    The government will introduce new laws to enable crowdsourced equity funding of public companies with a turnover and gross assets of less than A$5 million. Investments will be limited to a maximum amount of $10,000 per company, per year.

Why do growing companies fail?

Most growing companies in Australia are starved of cash, constantly running the gauntlet of paying payroll and keeping the Australian Tax Office and other creditors at bay. Why?

The insolvency statistics published by ASIC tell a sorry tale. In the latest report covering the 2013-14 financial year, 9,459 initial external administrator reports were filed with 22,606 nominated reasons for failure. The reasons given break down as follows:

Company failures FY14
Company failures FY14

So according to ASIC, at least 30% of companies in Australia failed during the 2013-14 financial year due to cashflow issues.

In our experience and speaking to experts, most growing businesses underestimate how much permanent capital they need to raise to fund their growing book of unpaid sales invoices.

Rapid growth and the extra demands it places on working capital usually puts businesses under cash flow pressure. It's mathematically certain unless you're in a business where your customers pre-pay for what you sell them!

In some cases businesses struggle through, in others they fall over in the growth phase. It is important to understand that you cannot grow without planning on how you will fund the growth. Generating profits to fund it on your own will take too long.

Before aiming for growth in your business, you need to understand and address several issues, including:

  • Cash flow optimisation - very important in the short and long term. You need to understand:
    • Your cash flow cycle
    • The demands of extra trading stock
    • The impact of increasing debtors
    • The effect and timing of your basic operating costs.
    • Cash flow forecasting - essential for any well run business, this involves developing realistic projections for your operational budgets. Sensitivity analysis will help you forecast the impact of errors (10%, 20% or 30%) in your assumptions.
    • Capital management - start by identifying how much capital the business needs and how much is being provided by the available sources. Your business is only funded from capital, debt, and retained profits and in the early days of the business there are no retained profits, so it comes down to capital and debt.

From the start there is a continuing requirement for capital management. This is about understanding:

  • The initial requirements or establishment costs of the business
  • Additional capital that will be required to fund growth
  • The timing and amount required to replace or upgrade capital equipment
  • Funding required to repay loans and retire debt
  • Taxation requirements
  • The expectations of the shareholders for access to profits

None of these items appear in the operating budgets of your business, yet each of these draw cash from the business. You could have a profitable business and be cash flow positive from operations, yet be under significant cash flow pressure. If you want to grow your business successfully, then a capital management plan must be regularly reviewed and a capital expenditure budget should be prepared each year.

Our Growth Check-Up Tool highlights how much more cash becomes tied up in your invoices as you grow - cash that you will need to pay suppliers and cover other operating costs.

An Australian First : the first SME loan book ever to be disclosed

In an industry first, InvoiceX has today published its full loan book as part of its push for greater transparency in Australian SME finance.

The loan book contains anonymised data on more than $6.5 million of invoice trades from the platform’s launch on 20 November 2014 to 31 December 2015.

During this period, InvoiceX facilitated 201 trades for SMEs with an average trade face value of $33,098, weighted average discount fee of 1.17% per calendar month and average settlement period of 35 days. Larger trade values of close to $200,000 in the last three months of 2015 saw average trade face value increase to $44,133.

We want to ensure that all business owners in Australia who are eager to grow have access to transparent and fair finance which puts the rights of borrowers at the centre of the lending process.

We have set ourselves ambitious targets to help Australian businesses grow.  Our institutional-grade platform is ready to service the needs of our customers on a low cost basis. As a result, we are confident that we can provide the best deal for growth capital in Australia.

The data is available publicly for anyone to download and will be updated regularly.

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