bank funding

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.

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.


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


…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…

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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…

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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…

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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…

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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…

APRA ignores our banks' offshore funding elephant - 53% of GDP

Interesting perspective from Macrobusiness

February 11, 2016 

By Leith van Onselen

APRA chair, Wayne Byres, appeared before Senate Estimates today and gave the Australian financial system a clean bill of health, stating it remains “fundamentally sound”. From Business Spectator:

Appearing before a senate committee this morning, Australian Prudential Regulation Authority (APRA) chair Wayne Byres said nothing that had occurred in the last few months had changed his assessment.

“As you would expect, we are keeping a close eye on global developments, but the declines in stock markets and the increases in credit spreads that have occurred in recent times have been quite manageable given the sector’s strong starting position,” Mr Byres said.

“Indeed, this is why we require regulated institutions to maintain buffers over and above our minimum requirements — so that this sort of volatility can be absorbed without any significant stress.”

No mention, of course, of the Australian banks’ extreme reliance on offshore borrowings to help fund their mortgage book.

As shown in the next chart, the banks’ offshore borrowings hit an unprecedented 53% of GDP in the September quarter of 2015, and have been a key ingredient behind the banks’ growing loan books – mostly mortgages – which hit a record 210% of GDP as at September 2015:

The situation since then will no doubt have worsened further given the ongoing solid credit growth, which continues to dwarf that of both incomes and nominal GDP.

All of which is fine until offshore credit markets seize and dramatically raise the cost of funding, as appears to be happening currently (albeit in the early stages).

The funding situation would also deteriorate in the event that Australia’s sovereign credit rating is downgraded, automatically downgrading the banks’ credit ratings in the process. Given the rapidly deteriorating Budget deficit, it is a matter of when not if.

Why do our regulators continually ignore the gigantic foreign borrowings underpinning Australia’s mortgages and the housing market?