Productivity Commission misunderstands the impact of the growth capital gap

 The Productivity Commission Draft Report on Business Set-up, Transfer and Closure seems to have overlooked or misunderstood the obstacles that confront Australian businesses that are looking to grow. Most of their findings apply to micro businesses and they seem to be almost dismissive of the innovative capability of Australian small businesses. This may be a question of drafting as their infographic does a better job of highlighting the need to get more innovation going in this key segment.

They almost alighted on the growth capital challenge here:

"what is less clear from data on the current seeking and use of equity finance is the extent to which any barriers to its use might be discouraging businesses from investigating it as a financing option."

As summed up by The Australian:

In its draft report in May, the Productivity Commission found access to finance was not a barrier for most new businesses.

But the Chamber of Commerce & Industry Queensland says it disagrees, while the national small business advocate has insisted access to finance was still an issue for some small companies.

In a submission responding to the draft report, the CCIQ says ­finance is “particularly difficult” for entrepreneurs with new ideas.

“Stricter lending requirements post-GFC have limited the avenues for small business to access finance for working capital, investment and business expansion,” its submission says.

“Existing regulations are restrictive and fail to accommodate viable businesses, making it increasingly difficult for small business owners to secure lending without providing significant security, which generally includes personal assets, such as the family home.”

 What are the obstacles?

The key points are:

1. Banks are solely focused on mortgage lending due to the combination of regulatory capital constraints (business lending requires 6x more capital) and servicing costs

2. Banks over-collateralise their secured loans to SMEs by taking an 'AllPap' security interest - this means all assets of the company, present and future, are secured by the bank as well as the family home. This precludes the SME from arranging working capital finance from an alternative provider - a key source of growth capital, especially for service businesses. This is not mentioned in the report.

3. The assumption is that new alternative finance providers will fill the gap if there is one to fill. From overseas experience, it will take many years for SMEs to learn about alternative finance options.

What can be done?

These problems could be easily addressed by the following solutions:

1. Requiring banks to release security over circulating assets (at least) or other assets which are not required to secure a mortgage within 5 business days, if not an unreasonable request

2. When banks decline credit to an SME, they should be required to refer the SME to an alternative finance panel/website listing other options

3. Government should set up a wholesale Business Bank to support the supply of SME finance through finance providers


The same problems were flagged in the UK as P2P lenders started to develop in recent years. The UK Government has started to address the issues.

Example - UK Budget 2015:

"The Government plans to force the banks to share their SME credit information with other lenders and to offer to share the details of SMEs rejected for a loan with online platforms that can match them to alternative finance providers.

The British Business Bank has also been tasked with "increasing and diversifying" the supply of finance available to SMEs. The Bank will facilitate up to £10bn of finance by 2019, according to new forecasts."

Example - UK Budget 2014:

"2.236 Deeds of priority – The government has today (19 March 2014) announced a new agreement by the major banks to process most claims for a ‘deed of priority’ or ‘waiver’ within 7 working days, and for each bank to provide standardised documentation to simplify the process. This will speed up the process for SMEs seeking finance from challenger banks or other alternative finance providers."