sme finance

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  • Banks have effectively withdrawn from their original purpose: facilitate commerce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 
 

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.

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.

 

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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.

Government waste: bureaucrats teaching us how to grow businesses

Budget 2016: $90m of our money will be spent on workshops for the government to teach entrepreneurs! And tell them how to get a tiny handout. Unbelievable waste!

$10m of that money on our platform would go around 10 times in the next 12 months and help seasoned business people do a $100m more business right now.

 

 

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.

Our Growth Capital Problem

According to the Australian Private Equity & Venture Capital Association - AVCAL - Australia has around 30,000 businesses which fall within the private equity ‘investment range’ (i.e. businesses that have growth potential and which are likely to require significant capital injections to realise that potential) (see Figure 2).

Many of those businesses will, at some point in the medium-term, seek investors for a variety of reasons such as succession planning, expansion capital, and turnaround financing.

PE funds are currently invested in fewer than 350 businesses in Australia: meaning that they presently have the funding capacity to financially back less than 2% of the total ‘investable pool’ of up to 30,000 businesses.

Combined with the regulatory capital constraints imposed on SME bank lending, accessing finance for growing businesses in Australia has rarely been tougher.

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.

Invoice trading is booming in Australia, according to a report by KMPG, University of Sydney, Cambridge University and Tsinghua Graduate School

As reported in The Australian today, in the first Asia-Pacific report surveying Alternative Finance published this week, it is notable that, relative to consumer lending, alternative business finance and, in particular invoice trading, has developed much more strongly in Australia than in the US and the UK.

We are quoted in the article as noting that this underlines the exceptionally under-served nature of the Australian small business lending market, which at the recent Altfi Summit in Sydney was estimated to be seeking an additional $95bn of finance.

This trend is also reflected in RBA lending statistics which show property loans since the GFC have grown by $538.7bn (+54%) while business lending has increased by just $72.5bn (+9%).

(RBA Statistics: Business Credit Seasonally Adjusted: $765.5bn in December 2008 to $838.0bn; Housing Credit (Owner Occupied and Investor) $992.9bn to $1,531.6bn)

KPMG’s endorsement of invoice trading will go a long way, but regulation is what really builds trust in a sector. The truth is, unlike consumer lending, a sandbox won’t accelerate the development of innovative new business finance products – but increased involvement from and endorsement by the gamekeeper will accelerate business adoption.

The government’s most pressing need now is to accelerate the adoption of alternative finance by SMEs, which would provide a kick-start to our economic growth. Introducing disclosure standards as to the cost of finance and terms and conditions of finance – similar to comparison rates for mortgages – is a simple step to take, but would dramatically change the reputation of the sector.

It’s clear that the regulatory environment needs a 21st century approach, and the government seems to be aware of this, but we are all waiting to see words turn into action. We’re in a similar position to when the SMSF market first emerged – the regulators had to rapidly come up with a new approach then, and the need is even more pressing now with the increased speed of the development of new business finance products.

As Paul Keating said: “When we laid the foundations for the current superannuation system in the 1991 Budget, I never expected Self Managed Super Funds (SMSFs) to become the largest segment of super. They were almost an afterthought added to the legislation as a replacement for defined benefit schemes.” 

Time to get wriggle on!

  

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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. 

Little attention is being paid to the baby boomer business exit tsunami in Australia

A very interesting read. The conclusion is spot-on:

A significant opportunity to consider the issue at a government level appears to have been lost. If the factors leading to the baby boomer business exit tsunami are not adequately addressed, it’s likely to put a solid dent in Australia’s aspirations to be an agile, innovative and competitive economy.

There's an elephant in the room!

February 18, 2016

We have all experienced the “elephant in the room”: the big problem in the corner no one wants to talk about because it’s way too complicated or difficult. Everyone just hopes it will go away.

There is another sort of elephant in the room though, a far more insidious one, the “invisible elephant”: the big problem no-one has properly identified.

We have a big invisible elephant issue looming in the private business sector. It’s called the “baby boomer business exit tsunami”.

Here are the scary facts:

  • Up to 80% of private businesses in developed economies are owned by baby boomers. The Australian private business sector is estimated to be worth well in excess of $1.5 trillion, so baby boomer business owners currently own businesses collectively worth hundreds of billions of dollars.
  • The last of the baby boomers turned 50 last year, so the baby boomer generation is well and truly heading towards retirement. Most baby boomer business owners plan to exit their business over the next 10 to 15 years.
  • Fewer private business owners are planning to pass their business on to the next generation. In 2012, 38% planned to do so. It’s now dropped below 25%.
  • More than 70% of private business owners have no business exit or succession plan.
  • Most private business owners aren’t exit ready (ie their business isn’t in good enough shape to sell, even if they did receive an unexpected offer from a potential purchaser).
  • Anecdotal feedback from business brokers suggests that, at best, only three to four businesses in 10 they see are in a condition to be sold.
  • Good business exits and succession arrangements take far longer to complete than most business owners realize (often a number of years).

While time will tell exactly how the baby boomer business exit tsunami plays itself out, it’s likely to look something like this:

As baby boomer business owners reach retirement age and look to exit their businesses, it will lead to many more businesses hitting the market place than usual in a relatively short period of time.

The number of businesses being passed to the next generation has been steadily declining for some time.  Fewer children are interested in taking over family businesses; those who are entrepreneurially minded often prefer to start their own.

The flow on consequence is more buyers will be required to buy the increased number of businesses available for purchase.  It’s unlikely there will be sufficient buyers at various times to satisfy the level of selling demand.


As a result, many private business owners will be faced with the prospect of selling their business for a substantially lower amount than they want or, in many cases, won’t be able to sell their business at all.

If you’re a baby boomer business owner, the above scenario looks pretty bleak. However, the baby boomer business exit tsunami also has much wider implications.

The private business sector is often rightly described as the “engine‑room of our economy”. As the Turnbull government’s recent Innovation Statement highlighted, it is critical for Australia to ensure our businesses are, and continue to be, competitive, innovative and efficient to ensure we have a productive and resilient economy.

If the factors leading to the baby boomer business exit tsunami are not adequately addressed, it will inevitably have significant implications for Australian business and the Australian community generally.

In particular, it’s likely to lead to a higher level of businesses closing or failing than would normally be the case.  This will inevitably lead to:

  • job losses;
  • a lessening of competition in various markets;
  • the loss of innovation associated with failed or closed businesses;
  • the inability of many private business owners to adequately fund their retirements (which will effectively move the financial burden back to government);
  • a decline in key services in some sectors (such as professional advisory and health services, in which a disproportionately high level of smaller businesses are owned by baby boomers); and
  • a decline in a range of business sectors in rural and regional areas (where again, many smaller businesses are owned by baby boomers).

So, surely government is across the baby boomer business exit tsunami issue and are looking at ways to deal with it? Well, actually, they’re not.

Apart from a handful of good private sector research projects on the issue, and in contrast to developments overseas, there has been little attention paid to the baby boomer business exit tsunami in Australia.

There was an excellent opportunity for the issue to be comprehensively examined in the Productivity Commission’s somewhat oddly titled Inquiry into Business Set-up, Transfer and Closure. The Inquiry, announced in late 2104 by then Treasurer, Joe Hockey, and then Minister for Small Business, Bruce Billson, was aimed at improving “Australia’s productivity performance by encouraging entrepreneurship, innovation and increased efficiency of Australian business” and “giving small business every opportunity to build upon their role as the engine-room of the Australian economy”.

Given the importance to the Australian economy and society generally of transferring ownership of baby boomer businesses to new ownership in an effective way, it seems odd that the Commission paid so little attention to the issue in its large final Inquiry report. Even more strangely, the Commission virtually made only one, quite vague, recommendation on the issue of business transfer. In essence, the Commission said business exits were largely a commercial matter and government should, at most, only provide general guidelines on business exits to the market place.

A significant opportunity to consider the issue at a government level appears to have been lost. If the factors leading to the baby boomer business exit tsunami are not adequately addressed, it’s likely to put a solid dent in Australia’s aspirations to be an agile, innovative and competitive economy.

Here's a link to an interesting  report: Succession Reset

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.

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

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…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…

Grant Thornton leads calls for mid-size business minister - we totally agree. Critical driver of growth.

Good article in Accountants Daily. We think this sector deserves special attention, particularly given the declining appetite of banks to lend to businesses. We write about this subject a great deal and will keep writing!

The government can support the growth of its most powerful sector; Australian mid-size business, by establishing a Minister for Mid-Sized Business, according to the CEO of prominent mid-tier firm Grant Thornton.

Greg Keith, Grant Thornton Australia CEO, has led the push for the establishment of a Minister for Mid-Size Business in an attempt to bolster the middle market.

According to the firm, mid-size business injects a combined annual turnover of $1.1 trillion into the Australia economy; contributing a further $241 billion through wages and salaries, employing more than 3.7 million Australians in the process.

“As the engine room of our economy, we urge the Turnbull Government to incentivise mid-sized business. It’s time to appoint a Minister dedicated to fostering the growth needs of the sector and in turn boosting revenue growth for the Australian economy,” Mr Keith said.

“Despite their importance to the economy, mid-sized businesses are under-represented in the national debate. A Mid-Sized Business Minister is needed to develop specific incentive schemes to encourage growth and confidence where it will have the greatest impact,” he added.

Mr Keith also urged the government to establish a Strategic Development Fund, in the hopes of assisting mid-size business to break into the Asia Pacific market.
“This is an important initiative to encourage mid-size businesses to seek new revenue opportunities,” said Mr Keith.

In addition to initiatives to drive forward the mid-sized agenda, Mr Keith suggested that the concessions implemented for small business should be echoed for their mid-sized counterparts; such as a reduction in the company tax rate to 28.5 per cent and the immediate write off of new assets up to $20,000.”

“We would also like to see the Government extend some of its small business incentives to the more developed – and more likely to succeed – mid-size businesses, by extending the concessions to currently provided only to small companies.”

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.

SME business lending: the trend in favour of P2P lending is clear #ideasboom

Basel III regulatory capital rules favour mortgages 4x more than business lending so the trend in favour of P2P lending is clear:

  • SME bank loans represented only 15% of new business loans in Australia last year (Source: RBA)
  • SME loans by US major banks have fallen by 40% since 2006 (Source: Wall Street Journal)
  • Bank lending to London’s SMEs plummeted 40% in the last year but an estimated £350m of SME finance was completed through peer-to-peer lending in 2015 (Source: British Bankers’ Association).   

P2P finance has “the potential to become a game changer for small businesses and brokers. Because FinTech solutions are efficient and effective at lower scale, small businesses will be one of the main beneficiaries of FinTech’s disruptive power.” World Economic Forum Report, October 2015