Business banking in Australia is driven by mortgages. Growing businesses need working capital to grow. The current banking system cannot help.
Let's get behind alternate providers of capital to help our most ambitious business grow. There are tens of thousands of them out there, not just start-ups. We meet them every day, all gasping for the oxygen of working capital finance.
Whole-hearted Government support is essential to promote awareness - that's all that is really needed!
Here are recent observations from some very notable commentators who know what they are talking about:
Alan Kohler, 'Businesses are scared of banks, by George', November 2015
In other words, banks don’t want to lend to businesses and businesses don’t want to borrow from banks for fear of what they might do. In a nation whose finance sector is dominated by four banks, that’s a recipe for stagnation at best.
The lower risk weighting of real estate mortgages virtually forces banks to focus their lending on this and to steer away from business lending.
This is possibly the single greatest problem facing the Australian economy right now, and nothing the Reserve Bank does today, or next month, will change that.
Solely relying on ‘the market’ to unlock this potential will fail, as it has in the past. What is required is political and commercial vision and the courage to make substantial changes to the banking system. In a fast-changing and highly competitive world, a commitment to conserve the status quo will only lead to slow, withering decay.
Report by ACCA (the Association of Chartered Certified Accountants), the global body for professional accountants with over 140,000 members, 404,000 students and more than 8,000 Approved Employers in 170 countries - published in 2012 but worth re-reading as the report correctly foreshadowed the impact on SME finance worldwide:
Under Basel III, loans to SMEs are assigned a relatively high risk weighting, inherited from Basel II, which should, when combined with rising capital requirements and turbulent capital markets, result in a disproportionately high cost of capital for banks when lending to such businesses and a gradual shift of their entire business models away from SME lending. Moreover, the evidence reviewed by ACCA (2011b) suggests that capital set aside against SME loans has, in the past, significantly exceeded any losses from defaults.
David Murray's Financial Systems Inquiry last year made a very succinct point:
The core function of the Australian financial system is to facilitate the funding of sustainable economic growth and enhance productivity in the Australian economy.
Don Argus, chief executive of National Australia Bank (1992-99), wrote in his open letter to Malcolm Turnbull recently:
If we want growth, then we need businesses to lead the way and the National Reform Summit gives very sound guidance. You don’t get businesses with large numbers of employees without having an active pool of new businesses being created. The simple fact is that regulations and a complicated tax code have made starting and reinvigorating a business more difficult.
In Australia, we have a nominal GDP of $1.6 trillion. We have a commonwealth government gross debt of $425 billion, state government gross debt of $294bn and growing, non-financial corporate sector debt of $1.3 trillion (a large portion of which is funded from offshore markets) and household debt of $2.1 trillion, one of the highest debt-to-GDP ratios in the world.
Australian Chamber of Commerce and Industry chief Kate Carnell recently pointed to access to capital from the big banks as a hindrance holding small business back:
Ms Carnell said big banks were typically requiring mortgage security to be pledged for small business loans or otherwise providing credit cards with high interest rates. Alternative funding sources such as those from crowdfunding and other online lenders must be supported by the government, she told the summit.
Ms Carnell said it was understandable that banks wanted to minimise risk and maximise return on equity but “we went through the National Reform Summit where many comments were made about generating growth and productivity and innovation – which requires entrepreneurs growing and employing. That is all true, but none of it will happen if we have an environment where small business is not able to borrow. It seems like we skirt that issue a bit. The banks say there are no problems, of course they are willing to lend. Well, they are, but only when you can offer them a house.”
She called for light touch crowdfunding legislation to be introduced soon. She also encouraged alternative lenders to talk to SMEs about their offerings.
And some of our observations:
Plenty has been written about the difficulties that small businesses experience in obtaining loan-based finance from banks. However, even if you can access them, the disadvantages and downsides of term loans need to be considered carefully.
In our experience, growing businesses usually need a revolving credit facility, like an overdraft, rather than a loan that needs to be fully repaid in a short space of time. You need finance to grow - this is not something than needs a short-term fix.
Mortgage debt continues to grow but finance for business has been flat-lining for many years.