This finding ignores the obstacles faced by non-banks that might wish to address this market - particularly, PPSA security arrangements (over-collateralisation by banks). The general tone is that the market will sort it out.
Government could do something to ensure that the market for alternative finance develops strongly by recognising that dominant existing providers are not incentivised to co-operate. Dealing with monopolisation of security and helping raise awareness of alternative finance providers would make a big difference.
DRAFT Finding 7.2
While some new businesses are unable to obtain debt financing, there is no evidence to suggest that there are regulatory impediments restricting the ability of new businesses to access debt in Australia that require a policy response.
That some businesses rely on credit cards as a significant source of debt finance can be viewed as evidence of a funding gap. However, the existence of a gap in the traditional financing market does not in itself indicate a need for government involvement and new lending models, such as peer‑to‑peer lending, represent innovations that could go some way to filling the gap.
Evidence of a funding gap?
Several participants told this inquiry that often new businesses seeking a business loan are offered access to a credit card instead. Again, depending on the particulars of the product, credit card interest rates vary — an examination of the business credit cards offered by the major Australian banks indicates that rates on most cards range from 15 to 20 per cent per annum.
Credit cards represent high cost alternatives to business loans (especially residentially secured business loans). The size of loans available through credit cards is also usually less than a formal loan and repayment schedules are different. Consequently, while many businesses would prefer a credit card over no credit, their first preference would be a formal business loan.
This inquiry has heard repeatedly from the finance industry that lenders have an incentive to make profitable loans, because this is an important source of their earnings. While the small business lending market is deemed to be more concentrated than the household lending market, there is still competition amongst lenders to secure profitable business loans.
For some businesses that are being ushered onto credit cards, rather than a formal business loans, this may because their business prospects, business plan or lack of collateral mean that a credit card is the most appropriate debt product. Other businesses may have business prospects conducive to a lower interest rate, but due to banks’ inability or unwillingness to fully price on the basis of risk, are forced onto credit cards. To the extent that this is happening — and this is not possible to quantify — this represents a gap in the debt financing market.
If meeting this funding gap is profitable, it is reasonable to expect new and existing lending institutions would make these loans. This is already starting to happen with the growth of P2P lending, at indicative interest rates that sit in between the rates offered by banks on formal business loans and credit cards (figure 7.3).
This assessment is supported by the Financial System Inquiry that noted:
To the extent that some banks cannot source sufficient funding on commercially attractive terms to meet demand, market mechanisms such as the price of credit will attract alternative providers of funds, for example superannuation funds and other investors lending directly, greater prevalence of market‑based financing or peer‑to‑peer lending. (The Treasury 2014d, p. 15)