Fixing our business banking system is the most effective way to get our economy growing
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.
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.
"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."
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.
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.
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.
Big Companies Pay Later, Squeezing Their Suppliers - NYTimes. Now ASX: Rio, BHP & Woolies. What chance growth?
Invoice trading solves the problem.
Another week, another story about transitioning from the mining boom. Australian service businesses have a great deal to offer overseas companies. We see it every day. But without the finance to grow, how can you do it? Has anyone asked that question in Canberra?
Our broken Basel 2-3-4 system of regulatory capital makes our banks focus on residential mortgages, not lending to businesses. Time to change that. Now!
"Sheep, iron mine and Sydney Opera House," writes Yongyu Ma, a student, on the online forum Quora in response to the question "What do Chinese people think of Australia?"
Prime Minister Malcolm Turnbull this week headed a 1000-strong delegation of business people to China in an attempt to convince them we have more to offer.
Events and banquets were held across 12 Chinese cities, with Austrade officials acting as cupids, of sorts, setting up speed dating sessions for Australian businesses to tout the full diversity of our economic wares to Chinese buyers.
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
File your annual return on time – being prompt won’t necessarily boost your rating, but being late can cause problems.
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.
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 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.
The amount of tax that is overdue continues to rise. Over $35bn is in arrears and small-medium sized businesses owe most of it.
In 2014–15, the ATO granted over 800,000 payment plans.
This is a clear sign of the cashflow difficulties faced by businesses as a result of a banking system that favours residential mortgages over business loans.
This needs to change if our country is to prosper.
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."
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.
This Regulatory Impact Statement (RIS) considers whether credit provided to small business should be regulated, as part of the National Credit Reforms.
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.
Small business owners are under relentless cashflow pressure. In the last financial year, over 500,000 businesses entered into payment arrangements with the ATO.
Over $20bn is owed in overdue tax by SMEs, rising by the day.
Banks are not incentivised to lend to SMEs, only providing $11bn of finance last year - 15% of overall credit provided to Australian businesses.
The pressure is intense but in many cases can be solved. There are now many new sources of alternative finance available for SME businesses - 'Fintech', 'P2P' or 'Marketplace Lending' - but awareness is very low.
It is time to change all of this. SMEs employ most of our workforce and their success is absolutely critical for our future. We need to get the word out.
Taxman to axeman: Small business “carnage” as ATO wind-ups soar
Sydney insolvency practitioner Jamieson Louttit has warned the soaring number of SMEs being wound up by the Tax Office is resulting in “carnage”.
Figures compiled by Jamieson Louttit & Associates show 396 applications to wind up companies were filed with the Australian Securities and Investments Commission in July.
This is a decrease from May when 582 applications were filed but the data shows the number of wind-up applications over the past four months is the highest on record for that period of time.
Jamieson Louttit told SmartCompany the ATO has focused on extracting money from SMEs since the budget.
“It is like a shotgun that has gone off,” he says.
“It seems like carnage is hitting small businesses.”
Louttit says another 40 wind-up applications were revealed this morning showing that “the carnage is continuing”.
“To me the government is looking at [small business] as an easy target as opposed to big corporations which have a lot of money to defend it,” he says.
“My thought is the government is just short of money, to me it is as simple as that.”
Jamieson says the wind-up application threshold was $300,000 in the past but has now dropped to $30,000 and the government is “not as forgiving” about entering into arrangements with small business.
“Every business runs around on cash not WIP and debtors, at the moment the government has $20 billion in WIP and debtors in SMEs,” he says.
“The budget came out in May and since then the increase in wind-ups has been significant.”
Jamieson says the affects on small business and the broader economy are significant.
“It is just killing the economy, it really is,” he says.
“For every insolvency, four other people are affected, that’s the people who are owed money, suppliers and customers. Every business they wind up rather than being a bit more forgiving has a detrimental affect on the economy.”
A spokesperson for the ATO told SmartCompany its preference is to work with businesses to help them manage their tax debts.
“As the Commissioner said during his address to the National Small Business Summit on 16 July, our intention is to be more active to prevent debts, to provide appropriate help and support when people are in debt, to take the right action to prevent debts from escalating, and to take legal action earlier when it is warranted,” the spokesperson says.
He says the ATO uses “sophisticated analytics” to tailor the timing and selection of our next best action, from preventative measures, such as SMS reminders to legal recovery which enables it to resolve debts earlier.
“Where a business does not work with us, we will take stronger action to ensure that it does not gain an unfair financial advantage over the majority of businesses who pay their tax bills on time,” the spokesperson says.
“This includes initiating wind-up action where there is evidence that a company is insolvent.”
The decision to grant a winding-up order rests with the court and the ATO has provided over 500,000 payment arrangements in 2014-15.
“We did have a greater focus on legal action in the second half of the 2014/15 year and filed about 1200 wind up actions in this period,” the ATO spokesperson says.
This report is based on a survey of over 500 alternative finance platforms in 17 Asia Pacific countries and regions, capturing an estimated 70 percent of the visible market. As the first comprehensive study of the Asia-Pacific online alternative finance market, this research contributes to the growing body of data supporting the region’s potential.
16 March 2016