SME finance

#Reform: How #auspol can help match #smallBizAU rejected for finance with alternative lenders


UK Perspective

Context - March 2014

Budget 2014 in the UK announced that the government would consult on whether and if so, how, to take legislative action to help match small and medium sized enterprises (SMEs) that have been rejected for loans with challenger banks and alternative finance providers who are looking to offer finance. The government believed that positive action in this area would be an important step to improve access to finance, and would encourage a more competitive banking sector. The government undertook a consultation which complemented proposals, announced by the government at Autumn Statement 2013, to require banks to share information on their SME customers with other lenders through Credit Reference Agencies.

At present the largest four banks in the UK account for over 80% of UK SMEs’ main banking relationships. Many SMEs only approach the largest banks when seeking finance. Although a large number of these applications are rejected - in the case of first time SME borrowers the rejection rate is around 50% - a proportion of these are viable and are rejected simply because they don’t meet the risk profiles of the largest banks. There are often challenger banks and alternative finance providers with different business models that may be willing to lend to these SMEs.

Although the largest banks will sometimes refer these SMEs on (e.g. to brokers), in many cases challenger banks and other providers of finance are unable to offer finance as they are not aware of their existence and the SMEs are not aware of the existence of these alternative sources of finance. This is a market failure, of imperfect information, resulting in SMEs that are viable loan propositions not receiving the finance they need.

Some attempts have been made to address this market failure, but they are limited in scope and have been slow in achieving results. The UK government is committed to helping small businesses access finance, and believes that more can and should be done. The subject of their consultation was whether or not to address this market failure through a much more ambitious government intervention that would increase the amount of information that is available to challenger banks and other providers of finance about businesses seeking finance, but which are rejected for finance by the major banks. The consultation asked whether this government intervention is needed and, if so, for views on how the government should deliver this, including via a preferred option of referral to private sector platforms.

Detail of outcome - December 2014

The UK government welcomed the widespread support for its proposals to improve access to finance for SMEs through a mandatory process whereby lenders are required to share details of SMEs they reject for finance, so those businesses can be approached by alternative lenders.

In light of this support, the UK government decided to proceed with legislation through the Small Business, Enterprise and Employment Bill. The legislation will require the largest UK SME lenders to forward on details of SMEs they reject for finance (where SMEs give their consent) to platforms that will help them be linked up with alternative lending opportunities. Private sector platforms will be designated to receive this information by the government on the basis of their meeting clear minimum standards that focus on ensuring that SMEs are in control and properly protected throughout the process.

The government published draft regulations to assist Parliament’s scrutiny of the powers in the Small Business, Enterprise and Employment Bill. These are not in final form and further changes may be made before the regulations are made.

The government intends to institute further requirements for ‘online platforms’ that wish to be designated under these regulations; these will be set out non-legislatively in due course.


Business Banking Loyalty put to the Test – E&P


(10 August 2015 – Sydney) Customer loyalty in business banking is fading fast according to study results newly released by research house East & Partners (E&P).

Interviews conducted with a national sample of 983 enterprises for the firm’s Business Banking Index (BBI), a key monitor of business banking sentiment, shows customer behaviour and engagement with Australian banks is evolving rapidly.

On a scale of 10 (not loyal) to 100 (very loyal), the market wide average has halved from 41.5 in July 2008 to a current record low rating of 20.8 in July 2015.

Small businesses are particularly disgruntled, registering a loyalty rating as low as 11.2. This figure compares to ratings of 24.0 for the institutional segment and 46.2 for the middle market – over four times higher than SMEs.

Deteriorating customer loyalty is matched by similar declines in empathy, satisfaction and most importantly customer advocacy. Driven by credit experiences, small businesses previously conveyed a strong view that provider choice and competition for their business was lacking.

This factor is holding significantly less sway however as non-bank and international competitors jostle for market share growth based on selected product, digital platform and service features.

Transaction banking, FX and Trade Finance products are most influenced by business owner’s preparedness to advocate their primary bank yet business banking advocacy remains effectively non-existent among the majors.

Surprisingly, customer churn has not yet materially accelerated in response to critically low sentiment. Forecasted churn is climbing quickly however and wallet share across several product lines is under severe pressure as businesses choose to ‘multibank’.

The latest BBI report found that up to three quarters of Micro businesses are prevented from accessing credit due to a slow credit approval process while one in two SMEs are dissatisfied with their bank but have not considered alternatives. One in three institutional enterprises expressed concern over the stability and strength of non-bank lenders yet less than five percent of small businesses shared their apprehension.

“These results certainly raise warning signs for the Big Four in terms of maintaining strong margins. Small business banking customers report that longstanding, positive relationships are simply not helping in their debt funding needs. This factor alone is clearly negatively influencing their loyalty to their primary transaction bank and/or lender.” stated E&P’s Head of Markets Analysis, Martin Smith.

“When asked to recount the number of direct personal contacts with their bank in the past month, be it in person at a branch, by email or phone with a business banker, a mere 23.9 percent of CFOs and treasurers answered in the affirmative.

“Generally contact is also of a reactive nature for several established brands with the exception of BOQ, CBA and Suncorp whose customers reported up to 80 percent of contact was initiated by the bank. Product specialists and innovative channels for dealing with the bank are undeniably important and warrant further investment and development, however for the great majority their basic expectations for product and service outlay are simply not being met” he added.

Key Stats:

  • The overall Business Banking Index score fell two points since May 2015 to 26.8 (where 10 = low to 100 = high).
  • QLD based CFOs and treasurers display sentiment that is three times more positive than Victorian businesses (22.0) and NSW businesses (13.7).
  • Four Banks have improved customer sentiment in the last year, including Citigroup (22.7), CBA (18.6), BOQ (66.3) and Suncorp (27.8)

Contact with Bank in the Past Month % of Respondents

Source: Business Banking Index – July 2015

About the East & Partners Business Banking Index

The East & Partners Business Banking Index is a bi-monthly Index of business customer behaviour towards banks. The Index provides a monitor of several key drivers of customer engagement behaviour with their banks including advocacy, empathy, satisfaction, loyalty, detraction and mind share.

The BBI has proven clear predictive correlations based on customer engagement behaviour and intentions with key bank performance outcomes both in aggregate and by individual bank. Its leading predictors are strongly connected with measures such as market share, customer retention, wallet share, product cross-sell and bank margins.

Business Depositor Segments:

Institutional – A$725 million plus
Corporate – A$20-725 million
SME – A$5-20 million
Micro – A$1-5 million

The man who united Britain's biggest alternative financiers

Our view: an interesting perspective on what good government policy can do for small business growth. The best way to help small businesses with the funding gap would be if banks were forced to pass them on to other providers if they didn’t want to lend to them.  

Adam Tavener has scars from his time as a deck hand and once caused an IRA bomb scare with a bag of dirty laundry.

Adam Tavener, the founder and chairman of Clifton Asset Management, is a busy man. In just a couple of years he’s gone from being the leader of a fairly successful asset management business to one of the most influential members of the alternative business finance industry.

As the man behind Alternative Business Funding, a platform that connects businesses with alternative funding providers, like crowdfunders and P2P lenders, he’s ended up advising the Government on how to implement new legislation forcing banks to refer rejected business loan applicants.

‘I’m having meetings and conversations with people I wouldn’t have dreamed of two years ago,’ he tells MT. ‘My diary is full of stuff that makes me think, "Really!? Wow, how did that happen."’

It’s all a far cry from his early career. Born in Timsbury near Bath, he left school with solid O-level results but a family fall-out meant he had to find work instead of continuing his education. After an unsuccessful spell at an estate agent (‘I probably had some attitude problems and some issues around authority,’ he says), he picked up his backpack and headed for Europe, ‘to seek my fortune.’

There he found himself working as a deck hand on a yacht in Majorca. ‘It was quite good fun but unbelievably violent at the same time. I went through all sorts of interesting scrapes and ended up in hospital – that’s where this came from,’ he says, pointing out a faded scar on his arm - though he doesn't elaborate any further.

‘But oddly enough, it was an education in its own right and it certainly knocked some of the lumps off me,' he says. 'The sort of people I was working with weren’t going to tolerate any sort of attitude.’

But things took a turn for the worse, he says, and he soon decided to return to the UK. After sleeping on friends’ sofas and park benches for a month or so, he eventually landed a commission-only sales job with a savings and investments distributor in Bristol – although not before causing a bomb scare.

As he was sofa surfing, Tavener had nowhere to leave his other clothes after changing into his suit for the interview. So he left his bag behind a door in the building where it was taking place. But this was at the height of The Troubles, and not long after the IRA had set off a bomb in Bristol, so the building ended up being evacuated.

‘I had to kind of put my hand up and own up to the fact that it was in fact my really stinky clothes,’ he says. That didn’t stop him getting the job though. ‘Because they had no investment in the outcome, that particular company offered to give me a position which was essentially a desk, a yellow pages and a telephone.’

After a few years in sales Tavener decided to set up his own business in the same field – initially as a partnership with some colleagues and in 1985 he went on to launch what would become Clifton Asset Management. Initially just him, a phone and a desk under his friend’s stairs, today the firm employs around 100 people and has £380m of assets under management.

It also offers an unusual business finance product called Pension-Led Funding, which allows entrepreneurs to tap into their pension pot to fund their business expansion. That’s how Tavener came to be involved with the Government’s legislation, which will force banks to refer small businesses to other lenders. Tavener says the seeds of that legislation came from an Innovators in Finance summit he attended at Downing Street at the start of 2013.

‘I was walking over Westminster Bridge thinking "if I’m going to this thing  I might as well have something decent to say". I thought ideally, what would I like out of this?

He stood up at the event and suggested that the best way to help small businesses with the funding gap would be if banks were forced to pass them on to other providers if they didn’t want to lend to them. Lo and behold, legislation is currently passing through Parliament that should make that the case.

To demonstrate how the referral system could work, Tavener drew together the biggest names in  alternative finance to launch Alternative Business Funding, a portal which helps businesses decide which source of finance could work best for them.

The founders of MarketInvoice, Seedrs, Zopa, and Platform Black, a representative of Crowdcube, Tavener and a founder of Funding Circle at the launch of ABF last March

‘The reason for that was I could kind of see the way that that direction of travel was going,’ he says. ‘I thought, if people are going to try and huddle together into groupings, the only way to guarantee your admission to a grouping was to make it your grouping. I thought – there’s an opportunity to seize the momentum here.’

The platform was launched in March last year and is set to be one of the places banks will be able to refer rejected applicants to. Along with Clifton, its founding members were Crowdcube, Funding Circle, MarketInvoice, Platform Black, Seedrs and Zopa.  ‘It is intensely difficult to get seven founders of business who like to be in control to sit around and talk about anything,’ he says.

The platform now has more than 20 members offering everything from short-term business cash advances to community development loans, and Tavener says investors have been offering to put some cash in to help develop the software further. He admits there's always a risk of being disrupted though.

'There is a danger with ABF that we go "ta-dah look how clever we are,"' he says. 'It's up to us to keep pushing hard, continue to be thought leaders and stay in front. If we can keep doing that we should always stay ahead of that curve, but we are not insulated from disruption at all – we’ve got to learn to keep disrupting ourselves.'

Management Today

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  • Completely confidential
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  • No personal guarantees, no real estate security

IX is an online marketplace for working capital finance. We connect sophisticated investors with creditworthy borrowers who want finance on better terms.

IX provides a trusted alternative approach to the daily cashflow headache faced every day by Australian businesses - the smart way for ambitious businesses to fund growth.

About us

We specialise in helping small-medium sized businesses trade with big businesses, government and other large institutions. We are a privately owned and operated Australian business run by experienced professionals with a long term approach. All our clients have come through referrals and word of mouth.

Advanced technology + more efficient model = better rates + more convenient process

Re-inventing Australian Business Finance

Why banks must update their legacy systems -

invoice finance re-inventedThe apocryphal Henry Ford quote, “If I asked people what they wanted, they would have said faster horses,” applies to technology investment by banks. Most do not want to alter their underlying core technologies because they fear change.

Consequently most banks are riding “faster horses” when what they need is a car. Their last-generation technology is antiquated, according to the Prudential Regulatory Authority (PRA), the Bank of England’s supervisory arm for financial firms. Banks struggle to offer modern services as a result and are struggling to manage the cost of maintaining many, ageing technology platforms.

Aymen Saleh, partner at consultancy Boston Consulting Group, which benchmarks bank IT spending, says: “Among the banks, only a small handful have made an investment to simplify their technology and make it modular. They are now in a far better position than the others in addressing the three priorities of regulatory pressure, service provision and cost.”

For those that have not invested, the risk of technology failure from poor integration or mismatched performance levels is a threat that regulators are taking seriously.

Dermot Crean

Director, InvoiceX

(03) 9020 4161

Another satisfied customer in Sydney with a growing business and working capital needs

We are thrilled to have funded three high quality invoices ranging from $10,000 to $25,000 each in recent weeks for a leading edge Sydney firm run by a talented Gen Y services business going places.  Once the account was opened at no cost to them, each trade was turned around in minutes. This is another example of what we at IX love doing for our customers!


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The seventh megatrend: why Australia must embrace innovation



An emerging new “megatrend” is that Australia’s scientists and researchers need to be more innovative, particularly if the country is to play a significant role in the world’s economy.

Megatrends are deep-set trajectories of change that will reshape the landscape for government, business and society over the coming 20 years. They herald both challenge and opportunity.

The term was minted by the American John Naisbitt in his 1982 book, Megatrends. Today megatrends are used by organisations such as CSIRO, KPMG, Boston Consulting Group, Price Waterhouse Coopers, the United States National Intelligence Council and many others.

Back in 2012, at CSIRO we identified six global megatrends that would substantially change the way people live in Australia.

They told a story of natural resource scarcity in a growing world, pressures on biodiversityand the global climate, a changing world economy, an ageing population and escalating healthcare costs, the rise of the digital economy and the all-important experience factor for consumers, societies and individuals.

Many of these themes remain but after three years the story is changing. New topics include the rise of artificial intelligence, structural change within the Chinese and East-Asian economies, the era of big data and digital disruption to name a few.

The seventh megatrend

We have identified an additional, seventh megatrend, known as “the innovation imperative”, which I have detailed in a new CSIRO book titled Global Megatrends.

This megatrend argues that Australia and advanced economies are in a tight spot and the only way out involves risk-taking, new ideas and blue-sky scientific research.

Promising areas for such research and development include regenerative and personalised medicine, energy storage, artificial intelligence, autonomous systems and informatics. But the innovation imperative cuts across all fields of scientific research and human endeavour.

Why does innovation matter more today? The main reason is that we generated wealth last century by doing some clever things – mostly basic things such as exploiting high grade and easily accessible mineral ore deposits, or opening up new areas of land.

Now we’ve done all the basic things we need to do clever, and very clever, things.

Tyler Cowen is a professor in economics at George Mason University who argues that productivity decline is happening in advanced economies because we have run out of ideas. The title of his 2011 book gives much away about his thesis – it’s called The Great Stagnation – How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.

Cowen tells a story of declining productivity because, according to The Economist, the “ideas machine” may have broken down.

Mining for ideas

The fuel source for growth in an advanced economy is no longer land, minerals or water. The fuel source of a modern economy is ideas. That’s because ideas are how industry achieves more output for the same or fewer inputs.

Ideas allow us to light a room with bulbs that have the same luminosity as older technology bulbs but consume less power. Ideas allow us to construct a building with fewer materials, but which perform the same functions. Ideas allow us to make cars, trains and planes that travel faster, cleaner and more safely. In other words ideas allow us to do more with less.

When multiplied across the economy, ideas allow us to increase productivity – the ratio of inputs to outputs in a production process. Productivity is an underlying driver of wealth creation. Productivity improvements ultimately mean we can raise people’s incomes.

In his book The Age of Diminished Expectations: U.S. Economic Policy in the 1990s, theeconomics Nobel Prize laureate Paul Krugman is famous for saying:

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

Does this situation apply to Australia? Data compiled by the Australian Bureau of Statistics show that productivity has experienced a sustained period of strong growth over the latter part of last century and into the beginning of this century.

Multifactor productivity for all industries in the Australian economy. Australian Bureau of StatisticsAuthor provided

But at around 2004 it hits a peak. After that it starts to decline. There are some questionsabout how alarmed we should be about productivity decline and whether it’s a cyclical phenomenon or a sustained slump.

Regardless of how these questions are answered the overwhelming view is that it would be much better for the Australian economy (and people’s incomes) if this graph resumed an upward-sloping trend. And quickly.

And the future looks…?

But the future is not that bleak. At least it doesn’t need to be. Tyler Cowen’s book title ends with the words “… and Will (Eventually) Feel Better”. A return to productivity growth can and will happen in Australia as well.

It will be achieved by a return to deeper innovation. Our rapidly changing world means what was once a bold idea is now mundane. Bold and new ideas will come from fundamental research that helps us understand how physical and social systems operate.

This will allow us to identify radically new and improved ways of manufacturing goods, extracting resources and doing everything industry does better.

That’s the challenge before Australia’s innovation system. We need to dive deeper and push the boundaries of knowledge into new places. As the Chinese economy transitions into an advanced services sector economy, Australia needs to become an advanced-services sector economy.

We need to build new industries connecting to new export markets. The World Economic Forum argues that digital technologies combined with rapid income growth in emerging Asian economies sets the scene for a boom in knowledge and creative industries.

To capture these opportunities Australia needs to breathe new life into our innovation system. To continue to grow our economy and create wealth for future generations we are faced with an imperative to innovate like never before.

Dr Stefan Hajkowicz will be speaking about the megatrends and the innovation imperative at the Australia 2040 Summit at Parliament House in Canberra on May 26, 2015.

Stefan Hajkowicz is Leader - CSIRO Futures at CSIRO.

This article was originally published on The Conversation. Read the original article.

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A great Australian SME success story - "perhaps we could bottle this mob's blood"

By Alan Kohler

To find the economic green shoot that Treasurer Joe Hockey was talking about yesterday you take Story Bridge across the Brisbane River, go left at Shafston Avenue and then follow Lytton Road to the suburb of Murarrie, where you’ll find NOJA Power.Without even slightly overstating the matter, this business represents the Australian future that the boffins in Canberra and Sydney habitually put into their PowerPoint presentations and Cabinet submissions and the politicians dutifully spruik.

In 13 years, NOJA has become a world leader in high-voltage switchgear. All the products are made in its Murarrie factory and shipped out to 82 countries.The key reason the Reserve Bank cut interest rates yesterday was that non-mining business investment is flagging. The mining boom has ended (again, because it’s a cycle), but thanks to Australia’s high cost of living (specifically housing) and three crushing years of an exchange rate above parity, manufacturing is buggered.According to yesterday’s trade data, manufactured exports fell in March by about half as much as resources exports, and have basically not changed for seven years.

Through all this -- through the GFC and the Dutch disease exchange rate of 2010-2013 -- NOJA Power has quietly built an $80 million a year export manufacturing business on the banks of the Brisbane River.NOJA stands for Neil, Oleg, Jay and Quynh Anh, the company’s four original shareholders and directors. Another joined a couple of years later and the five are Neil O’Sullivan, Oleg Samarski, Jay Manne, Quynh Anh Le and David Dart.Neil is chief executive officer, with 52 per cent of the company; the others own 12 per cent each.

Oleg is quality and service director, Jay is engineering director, Quynh Anh is finance director and David runs R&D.They have pulled off a truly remarkable achievement, creating a global player in high-voltage switches from nothing in 13 years.All five worked for a Brisbane business called Nu-Lec Industries, which was sold by its owner Greg Nunn in 2002 to the French giant, Schneider Electric, for $89m (itself a very fine achievement).Amazingly, Schneider did not lock in O’Sullivan, Samarski, Manne, Le and Dart -- the key personnel in the business -- and they were able to leave pretty much straight away to start their own business.

The first thing they did was to buy a factory, one of five in a block of units, so they would have collateral for bank funding. Then they applied for a START grant for $750,000, which they matched with their own money, and spent the entire $1.5m on research, designing a range of high-voltage switches from the ground up.In 2003 they sold their first piece of equipment to China. And in 2004, two years after starting out, their sales were $5m, almost all of it exports.In 2006, they lined up for another federal grant, this time $2.5m, which they were able to match out of cash flow. More R&D and more innovation, all the while employing more and more people.

They bought the rest of the five units in the block one by one and then a few years ago bought two acres on an industrial estate up the road with $8m in cash.For the past few years, NOJA Power has doubled its turnover every year and now has sales of $80m to 82 countries and is regarded as the world leader in what it does. The company has 200 employees in Brisbane, with another 25 in a small factory in Brazil and full-time sales managers in four countries.

They basically make one product: auto reclosing circuit breakers for high voltage power lines.It’s a specialised, expensive and high-margin line and exactly the sort of thing Australia can get away with as a high-cost country. It will never be a low-cost country no matter how many indentured slaves are imported to pick fruit (see Four Corners on the ABC this week), and no matter when the RBA and APRA try to put a lid on house prices with mythical macroprudential policies while actually cutting interest rates to drive them up.The secret to NOJA’s success was R&D. Neil O’Sullivan says they couldn’t have done it without those two federal government grants.

He and his colleagues invested $20m of their own money on R&D while the government put in $2.25 million. As a part-supplier of that cash, I’d say it was money well spent.O’Sullivan says that apart from the research, the key to success in manufacturing these days is being “globally focused”.“You can be competitive as long as you have a high-quality product that you market well and, importantly, you source components globally as well.“We source our parts in multiple currencies which means we have a natural currency hedge.”He says that at this level of manufacturing, Australian labour is competitive and, in fact, they are better off making the products here than, say, in China.

When asked if they have an exit plan, O’Sullivan says: “No, but I suppose we’ll have to exit one day.“When we do, I’d like to see our young managers take over. We’re very focused on apprenticeships and education programmes and as a result we’ve got a lot of bright young engineers coming who deserve the sort of chance we had.”Australia deserves the same chance. Perhaps we could bottle this mob’s blood.

CBA dud profit smashes banks

Commonwealth Bank (CBA) is the next cab off the banking ologopoly rank to report some pretty flat but still fat and taxpayer supported profits this morning.

Following ANZ’s steady but squeezed result and Westpac shores up its increasing expensive capital with an equity raising, the biggest mortgage holder/pusher in the land offered a very flat result that has sent bank stocks plummeting in early trade. Here’s the gist from the quarterly update which is not as comprehensive as the half yearly results from the other majors:

  • net and statutory profit $2.2 billion – down from $2.3 billion in the same period last year
  • net interest margin (NIM) “impacted by competitive pressures”- so probably falling 4-8 basis points like its peers to just above 2%
  • expenses rise due to its financial planning scandal payouts
  • “subdued” revenue growth of 5% with sub-peer growth in its loan book
  • troublesome and impaired assets fell to $6.4 billion, from $6.5 billion in the previous quarter
  •  deposit growth of 10%

Well I guess we now we know why they only passed 20bps of the rate cut on as the squeeze for earnings is real as is the race to improve capital quality. This statement was curious:

“Credit quality remained sound. In the retail portfolios, home loan and credit card arrears were broadly flat, whilst seasonal factors contributed to higher personal loan arrears,” the bank said in a statement.

Interestingly, although the graphs are purposefully obfuscated (a CBA tradition), it seems arrears are rising – especially in WA with Bankwest, even in the face of lower interest rates:


CBA is now down nearly 4% on the open, although I chalk up half of that to the falls in global markets overnight, although its ‘outperfoming’ its peers across the financials.Watch this space.

Basel banking rules demanding a 300 per cent risk weight be applied to small business, 15 times more than applied to a mortgage

Basel Committee on Banking Supervision is demanding a 300 per cent risk weight be applied to small business funding. Compared to residential mortgages that carry a weighting of less than 20 per cent, this would make it uneconomic for major banks in Australia to lend to small businesses. via Basel banking rules could lead to �2bn more SME funding.

UK Perspective – interesting developments for alternative business finance

The Bank referral legislation, part of the Small Business Act, could see up to £2 billion more funding being provided to SMEs, according to figures produced by the Alternative Business Funding Portal (ABF).

The ABF estimates state that, once implemented, the legislation would see more than 100,000 small businesses fast-tracked to alternative finance providers. This in turn could see up to £2 billion of funding enter the SME space within the first 12 months.

ABF has also identified that recommendations from the Basel Committee on Banking Supervision, demanding a 300 per cent risk weight be applied to small business, could see the initial 100,000 small business funding referrals from the banks to the alternative funding sector increase dramatically in the future.

Adam Tavener, chairman of and catalyst for the ABF, urged the next government to back the body’s mission in light of the new legislation.

“With a potential £2billion in alternative small business funding as a result of the banking referral regulation, it is vitally important that the party or coalition government elected in May drives the implementation phase through as quickly as possible,” he said.

He went on to say that, even though the organisation is not in favour of the new Basel rules, they could work in favour of the alternative lenders.

“If enforced, it will clearly increase the number of small businesses declined for finance by the banks and, as a result of the referral system, these will be re-directed to alternative funding providers,” he said.

The ABF is a group that aims to bring together the market-leaders for all forms of alternative funding: including invoice trading, peer-to-peer and pension-led funding. Some 12 new funders are set to join the umbrella organisation. Among them are UK Bond Network, Funding Knight and Venture Founders.

Paul Mildenstein, CEO of ABF portal funder Liberis, said the organisation’s impact on SME funding “should not be under-estimated”. “The ABF group has been a principal driver in shaking up the SME finance sector, providing a collaborative and accessible marketplace for borrowers and emerging lenders alike,” he added.

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Queensland company raises over $445,000 of working capital - no red tape

We're delighted to have helped another fast growing Queensland company raise over $445,000 of working capital recently. They had been left in limbo by their bank - 15 years and all they could get was a tiny overdraft and red tape. We solved the problem quickly when they joined our online confidential invoice finance trading platform. Within minutes of listing an invoice for sale, trades are executed with sophisticated investors on very good terms for the seller. And it is all entirely confidential, no lock-ins, no surprises.

We're here to help.

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Draft legislation released – unfair contract terms

In August 2013, the Abbott Government announced this important reform to give businesses a fair go. The protections will give businesses access to a level playing field to grow, invest and create jobs.

Consumers have been protected from unfair contract terms since 2010. It is time that small businesses, which often face the same vulnerabilities as consumers, receive strong protections when contending with “take it or leave it” contracts.

Under the new protections, a court will be able to strike out a term of a small business contract that is considered unfair. For example, a term that allows a big business to unilaterally change the price or key terms during the course of the contract could be considered unfair.

The protections will apply to businesses that employ less than 20 persons for transactions under $100,000, or $250,000 for contracts that last longer than 12 months.

These changes will support small businesses in their day to day transactions, but still encourage operators to conduct their own due diligence on large contracts fundamental to the success of their business.

Businesses that offer contracts in these circumstances will be required to comply with the new law.

The Government has provided $1.4 million to the Australian Competition and Consumer Commission (ACCC) to support implementation of the new law, including conducting an information campaign.

The draft legislation builds on extensive consultation undertaken in mid-2014, and follows confirmation that the Commonwealth has the necessary support from state and territory governments to implement this important policy reform.

The draft legislation and explanatory materials are available on the Treasury website for a consultation period ending 12 May 2015.

Treasury officials will also hold targeted consultations following the end of the public consultation process.

With this legislation, the Government is restoring time and resources back to small business to invest in their business success rather than navigating a costly and time consuming maze of red tape.

It is part of our strategy to ensure Australia is the best place to start and grow a business.

Dermot Crean

Director, InvoiceX


(03) 9020 4161

79 percent of small business owners use credit cards as a source of financing

According to the National Federation of Independent Businesses, 79 percent of small business owners use credit cards as a source of financing. But as access to credit has become more difficult, many are forced to use personal credit for business purposes. Will this trend continue, and why aren’t there more business credit card offerings in the market?

VB: Small business owners are increasingly looking to unsecured credit rather than traditional loans as a faster and more convenient funding mechanism. Credit cards provide free cash flow for almost 45 days, and in addition, they leverage cash back or reward points, which are helpful to offset future business expenses.

But as you mentioned, many businesses still use personal credit cards. I believe this was due to credit tightening during the recession and also the limited business card availability in the market today. The credit tightening was more severe for small business owners and as a result, those owners were forced to use their personal cards.

Secondly, when we look at financial institutions outside of the Top 5 issuers, historically, they haven’t focused on the small business segment. But now, this trend is changing rapidly. In the new world, FIs are more eager to lend and have started to build the right products. If you look at recent studies, they all suggest that small business relationships are more profitable overall, and for FIs, offering a product like credit cards adds to their profitability. Beside interest income, business credit cards deliver superior interchange and fee income which is largely due to attractive features on these cards.

Small business cards are different; they require a different underwriting approach to assess creditworthiness, and also require unique features for the account holder – spending limit controls and more detailed statements. I expect this trend to change and we’ll see more business cards in the market. It’s a win-win for FIs and small businesses.

The Changing Landscape Of Credit |

Dermot Crean

Director, InvoiceX


(03) 9020 4161


Splendid Luxury at the Bottom of the World

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Peer-to-peer lenders claim to be recession proof

IX view: commentators with a bank perspective tend to miss the key fact that assets and liabilities are perfectly matched on peer-to-peer platforms like ours - unlike banks. And in our case, the average exposure is less than 60 days.
The charge that the growing number of non-banks that use online platforms to directly connect borrowers with lenders might not survive a recession is rejected by these new entrants.This group claimed that peer-to-peer lending, crowdfunding and other alternative financing methods rose to prominence during the global financial crisis.

In the last seven years they have plugged a gap left by banks whose credit models prevented them from lending to some customers.

Yet, ANZ boss Mike Smith and Commonwealth Bank chief, Ian Narev, have slammed peer-to-peer lending as untested in an economic downturn or when interest rates were high.

Both questioned who would be responsible if customers were burned and both raised the issue of liquidity risk.

Products of the GFC

According to MoneyPlace chief executive, Stuart Stoyan, the high-profile bankers' comments were not only wrong but short-sighted.

He said the peer-to-peer lending model is better able to cope with changing economic conditions than incumbent banking systems.

Stoyan acknowledged that peer-to-peer lending is a new banking model and has not endured a downturn in Australia. But he also noted that Australia has not suffered a significant recession for over a quarter of a century.

“On the same logic, since the last serious recession was 25 years ago, it would be also fair to argue that the management teams of the major banks are also untested to manage during a recession," he said.

Test of business models

Three of the world’s largest peer-to-peer lenders were operating during the last financial crisis and each proved their ability to provide investors with positive returns on a through-the-cycle basis, according to RateSetter chief, Daniel Foggo.

“They have found ways to help ensure positive returns can be delivered in any economic environment. In the case of RateSetter, we pioneered our Provision Fund, which is a pool of capital available to compensate lenders if they are exposed to a borrower default," he said.

"Our first priority is ensuring that enough money goes into the Provision Fund to protect investors, in good economic times and bad.

“Our business model is very efficient, and we pass on the savings to borrowers in the form of substantially lower rates. If interest rates went up significantly, it’s very unlikely there’d be an impact on our business”.

Another claim is that peer-to-peer lenders have less expertise than the major banks and are therefore more vulnerable to financial instability.

“That is wrong,” said Stoyan. “Peer-to-peer lenders in Australia are mostly led by former bankers who understand the deficiencies in the outdated banking system.”

Liquidity not applicable

MoneyPlace is managed by four ex-National Australia Bank executives; its chief risk officer previously ran unsecured lending for NAB.

Prior to joining RateSetter, Foggo ran Barclay Capital’s investment arm and worked for NM Rothschild in London. SocietyOne has hired an Investec operative.

Stoyan dismissed suggestions of liquidity risk, saying that a liquidity event is not applicable to P2P lenders since an event can only occur there is a surge in demand for deposits.

For example, a run on a bank occurs when bank customers withdraw their deposits because they believe the bank might fail. This is an issue because the banks do not hold a dollar in cash reserves for every dollar they have on deposit, they lend it out.

“Peer-to-peer lenders directly match investors’ money to a loan. This means that these lenders are fully funded 100 per cent of the time," said Stoyan.

“Further, banks run complex treasury functions that try to minimise the amount of cash they hold so they can earn more profit lending it out. However, peer-to-peer lenders do not have a treasury function.

"If they don’t run a book, they do not need to manage liquidity. In fact, because we directly match investors and borrowers, we will never face a liquidity event. To suggest otherwise is scaremongering."

Level of transparency

“The concept of illiquidity for a peer-to-peer lender would only arise if investor expectations for the term of the investment were not matched by the term of the loan," said Leo Tyndall, chief executive and founder of Marketlend.

"In peer-to-peer lending, it is the investor who chooses his term and it is matched to the loan's term so there is no issue."

Foggo said RateSetter extensively stress tests its loan book as well as any bank, but more importantly, it provides a level of transparency to investors so they can make their own assessments.

Regulators are ensuring an appropriate level of regulation and oversight for peer-to-peer lending, Stoyan added.

Dermot Crean

Director, InvoiceX

Growth Capital on Demand.

(03) 9020 4161

Risk is wise but don't stick all eggs in the bank basket


A sure way for a conservative central banker to grab a headline is by urging "a lot more" risk-taking if you want a decent retirement.

Especially when he's about to pull the trigger on another rate cut. Even I'm impressed.

To be exact, Reserve Bank governor Glenn Stevens specified "those on the brink of leaving the workforce" need the extra risk for "the expected flow of future income they want" and  "it's important people realise how much risk is being taken (in the financial space) and are appraised of it".

Or maybe he's really saying don't be so greedy.

The old rule of thumb that you need $1 million at 65 for a comfortable retirement no longer holds because it was based on returns of 8 to 10 per cent and we're living longer. Sorry, but being a millionaire doesn't cut it anymore, not that I'm saying that was ever in prospect.

You can see the huge difference lower returns make in just five years from a comparison by Martin Currie Australia and subsequently quoted by fund manager Legg Mason from a $500,000 lump sum. The annual income from an annuity or term deposit shrank from $30,000 to $13,000.

But get this. Invested in the sharemarket, a beneficiary of falling rates, your retirement income would have risen from $37,000 to $44,000, counting the 30 per cent tax credit from franking.

Which brings me to Stevens' other point about taking more risk, probably without realising it. A good part of the returns of the average super fund is coming from rising bank shares and their dividends.

[bctt tweet="A good part of the returns of the average super fund is coming from rising bank shares"]

Three big banks are about to report their results for the half year to March. Ho hum,  more record profits. But look at why: it's the boom in housing where they're lending proportionately more, coupled with rock-bottom bad debts.

While neither is under immediate threat, especially while rates are being cut, they're not sustainable either.

Even if, fingers crossed, we avoid a recession, the banks will have to face higher capital ratios which ties up money earning next to nothing – call it poetic justice  considering what they're paying on term deposits – that could more profitably be lent out.

But my worry is how high their shares have already gone. Talk about a correction waiting to happen.


The drivers of SME confidence: availability of credit

Today we continue our analysis of the SME sector, using data from our recently completed SME survey. Yesterday we showed that overall SME’s are still in the doldrums, but the construction sector is definitely on the rebound, showing stronger confidence, and demand for finance, This is a direct consequence of the low rate environment, and increasing demand for housing. The rebound is strongest in NSW and VIC, which aligns with recent strong property prices. As we reported previously,we need 900,000 more dwellings to be built over the next three years to meet current and anticipated demand. Construction sector SME’s have an critical role to play, as they either provide sub-contracting services to larger building companies or fund their own speculative developments. We start our discussion looking at the drivers of SME confidence. Compared with last year, concerns about political instability have diminished, whereas availability of credit now has more weight.


If we look at the year on year changes in confidence, for the last two years, confidence does vary by industry. Specifically, we see a rise in confidence in the property and business services sector, and construction. In comparison, manufacturing confidence has dropped, as has confidence in the mining sector.


Next looking at what is driving funding needs, we find that the biggest, and growing need is for working capital.


We find that this need is driven by cash flow issues. Cash flow is being hit by long payment cycles, the need to pay taxes and GST, to pay wages and to buy materials. Business expansion was not identified by many SME’s as a reason to borrow more. This indicates that businesses are still operating in survival mode.


Looking specifically at debtor days we see a slight improvement this year, with the debts outstanding over 50 days falling for the first time in a couple of years.


Now we turn to the LVR (Loan to Value Ratio) for specific industries. The most significant observation is that SME’s in the construction sector have increased their borrowing, relative to their assets. This is a sign of increased momentum in the sector. Construction tends to have a higher LVR because of nature of their business, but we see a significant trend change this past year. This data relates only to those SME’s who borrow, not all do so.


Then if we look at losses, we see the banks are still experiencing elevated levels of loss, compared with the pre-GFC environment from the SME sector. There are some state variations, and we saw some divergence in 2011-2012. The latest data from our models indicates an adjustment towards more consistent state norms. These higher loss rates explain partly why the capital allocation and loan pricing for SME’s is higher than other classes of lending. We have highlighted the problem with these differences.


Finally, if we look at losses in the construction sector, they are still above the SME average, but are trending down, other than in WA which have been consistently lower than other states, but is now trending up now.


So putting all this together, the frail SME sector is patchy. Construction is waking up, with increased demand for finance, and bank losses falling. On the other hand, the resource sector is slipping off its highs. Other sectors, including retail and manufacturing are still languishing. The RBA’s wish to effect a transition from the resource sector to the construction sector is registering in the survey. Confidence in the construction sector is stronger, and momentum is picking up. The recovery is strongest in NSW and VIC, and slowing in WA. Fewer than 10% of all SME’s are linked with the construction sector, so others are not fairing as well, and continue to grind out a hand-to-mouth existence. We cannot put all our eggs in the construction basket!

Digital Finance Analytics, 29 April 2015

A Market “Plagued by Bad Practice”


The UK's leading online invoice financier has produced some telling research into the excessive cost structure of the traditional invoice finance product.

The invoice finance market is not currently regulated, meaning that its leading providers are not subject to uniform standards in terms of communicating price. MarketInvoice has itself had to overcome this lack of transparency in order to scrutinize the services  of the incumbent banks. The platform compared the revenues that the banks’ invoice finance divisions reported to Companies House with the banks’ self-reported advanced volumes within the invoice finance space – offering an insight into the average cost-per-round of the banks’ invoice finance product. It is reportedly the first time that this data has been exhumed.

MarketInvoice reveals that the nation’s banking sector has been fleecing businesses for £758m each year for invoice financing – an overcharge of £425m. That markup is reportedly the work of a complex maze of hidden fees. 50,000 businesses in the UK borrow £20bn every 3 months via invoice finance – predominantly from the leading banks (RBS Invoice Finance, Lloyds Invoice Finance and HSBC Invoice Finance). It’s the largest invoice financing market in the world.

MarketInvoice suggests that 26,000 of the UK firms using invoice finance from the leading banks are ending up on the receiving end of up to 35 different hidden fees. Based on a MarketInvoice survey of 1,000 UK business owners, two-thirds of businesses do not trust their bank not to overcharge them.

But how do MarketInvoice's services stack up in relation to this backdrop?

 The platform’s research suggests that the banks charge their customers 6.4p for every £1 advanced. MarketInvoice by contrast charges 2.8p for every £1. That equals out to an average saving of £16,000 per year for MarketInvoice customers – a collective saving to date of over £10m.

Anil Stocker, Co-Founder and CEO of MarketInvoice, explained:

“Thousands of UK businesses are being over-charged for short-term finance. This is costing thousands of businesses £16k per year on average and hundreds of millions in total. Businesses are afforded very little protection from hidden fees and long contracts because invoice finance is not regulated, as a result the market is plagued by bad practice. For now, the onus is on businesses to get free of their bank and explore alternatives."  

“At MarketInvoice we represent a way out - we’re helping businesses break-up with their bank and avoid this kind of over-charging. Since launch in 2011 we’ve saved UK businesses over £10million and will do more than that again this year alone. We have no hidden fees whatsoever and companies can leave with no notice.” 

The picture painted by MarketInvoice’s research has been in part corroborated by the actions of a group of individuals that are operatingunder the name RABF, who recently kicked off a campaign to “stop the abuse that is being carried out daily by a significant number of factoring companies at the expense of their clients”. The group is calling for a robust regulatory framework to be applied to the factoring industry.

Disruption thrives best in the wake of bad practice. MarketInvoice's research hammers home the need for an alternative.


The impact of P2P lending on banks


21 April 2015
When Bill Gates spoke his now oft-quoted “banking is necessary; banks are not” reference in 1994, I wonder if he knew exactly how right his quote would prove to be?I have a feeling that he may have.More than 20 years later, banks are becoming less and less relevant. An exponentially increasing number of disruptive services are appearing in the space traditionally left to conventional banks, and their market share is eroding.

Arguably one of the most innovative practices in disruptive banking services internationally, including in Australia, has been the emergence of peer-to-peer (P2P) services – mainly in lending.

Simply put, P2P lenders are not lenders at all, but rather they provide a matching service to link private investors with potential borrowers.

Of course, the industry is much more advanced than that.

In offering their lending service, P2P companies have developed their own cloud-based platform that includes a proprietary credit assessment model, an investor qualification program to ensure compliance with legislation and post-settlement management services.

Small, short-term, consumer-based lending has gained the most attention from these providers, with Nimble, SocietyOne and RateSetter probably making up Australia’s top three lenders in this space.

Of these, RateSetter is the only Australian platform licenced to accept registrations from retail investors, while the others are limited to dealing with wholesale clients only. As a result, it could be argued that they are perhaps a truer representation of P2P lending than their peers, who are limited to dealing with sophisticated or corporate investors.

The next natural domain of P2P lending is lending to small businesses – a space the Australian banks largely withdrew from in 2008. The Labor government at the time attempted to introduce the Australian Business Investment Partnership – coined ‘Rudd Bank’ – to support the business community. However, it was unsuccessful. Although it has taken some time, a new wave of private-style, P2P-funded lenders such as ThinCats have recently launched in Australia and will be followed by more entrants in the next 12 months.

Whilst the introduction of P2P lending will redefine personal and short-term lending in a similar manner to how securitisation changed the mortgage lending space forever in the 1990s, it will have virtually no impact on the mortgage space. Mortgage lending requires money being borrowed long term, yet P2P funding is traditionally lent for the short term. Whoever can solve this dichotomy will have a successful business.

Where will P2P take us over the next five years?

I believe we will see not only an increased number of lenders in the small-business lending space, but also the continued emergence and adoption of white-labelled platforms as a service option for aspiring P2P funders who do not have the resources to build or manage their own platforms. ClearMatch seems to be a leader in this space and is positioned to capitalise on this opportunity.

An interesting thought is the introduction of P2P insurance services and products. Most likely, this will be an extended service of the P2P lenders already operating, with the inclusion of the insurance risk model inserted into their already-tested platforms.

How will the banks react to these changes to the landscape? I expect that rather than directly compete against the P2P lending platforms, banks will become the platforms’ largest institutional investors, or they may even look to acquire them as they have done with nearly all of Australia’s mortgage securitisers.

If you can’t beat them, then ownership is the next best option.


View from the US: why small-medium sized businesses are using alternative lenders

blog_02_bigbanks View from Kabbage in the US - Kabbage has funded over $550 million to help businesses grow in the US. 

Many Big Banks are Still Slow to Lend

Even though the economy is improving and small business owners are more likely to apply for loans, there is a big lag between the growing demand for small business loans and the reluctance of big banks to actually issue those loans. Ted Zoller, director of the Center for Entrepreneurial Studies at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, states in, “A Look at the Future of Small-Business Financing,”that although loan demand is increasing, big banks are still recovering from the financial crisis. And that’s not the only thing holding them back; new regulations prohibit many banks from issuing as many small business loans as they used to.

“Across the board, bankers are seeing a rebound in credit applications for small-business loans,” Zoller says. “But the paradox is that banks are not in the position to fill that need to the extent they have been in the past. Regrettably, most of the capital available for debt is with large institutional banks that were significantly impacted by the financial crisis and now face substantial regulatory hurdles in determining creditworthiness for loans.”

Large Business Loans Have Recovered Faster

The news about bank lending is not all bad. A study from the Federal Reserve Bank of Cleveland, “Good News and Bad News on Small Business Lending in 2014,” found that bank lending to large businesses (loan amounts greater than $1 million) has reached a level 24 percent higher than it was before the recession. However, that same Federal Reserve study also found that small business lending (volume of loan amounts under $1 million) has barely recovered since 2012, and now stands at a level 17 percent below the pre-recession peak.

Why have banks been quicker to issue big business loans? Simply put: it’s often more profitable for banks to make big loans than it is to make small loans. According to a Harvard Business School working paper by Karen Mills, former head of the U.S. Small Business Administration, the transaction costs for a bank to issue and process a $100,000 loan are not much less than the costs of issuing a $1 million loan. So as a result, “Some banks, particularly larger banks, have significantly reduced or eliminated loans below a certain threshold, typically $100,000 or $250,000, or simply will not lend to small businesses with revenue of less than $2 million, as a way to limit time-consuming applications from small businesses.”

This can be frustrating for small business owners who “only” want to borrow $100,000 or less – but this and other structural barriers to traditional bank lending are unlikely to go away. Unfortunately, this type of bank lending environment is likely to be the “new normal” for small businesses.

More Companies are Getting Loans from Alternative Lenders

In response to the lending limitations of traditional banks, small business owners and entrepreneurs are doing what they do best: innovating. Instead of being denied their dreams or scaling back their business plans, small business owners are borrowing money from alternative lenders – including online platforms like Kabbage, peer-to-peer funding sites, or online marketplaces.

According to a recent CNBC article, “Why Small Businesses Don’t Want a Loan,” the size of the U.S. nonbank financial system is now estimated to be $3.2 trillion, with plenty of growth potential. Jef Stibel, CEO of Dun & Bradstreet Credibility Corp., was quoted as saying, “Alternative lending is a big deal and it’s becoming an even bigger deal for the smallest businesses with revenues under $5 million.”

Stibel also pointed out that according to Dun & Bradstreet’s Private Capital Access (PCA) Index, small businesses are significantly more likely than larger companies to use online marketplaces to get financing. During the first quarter of 2015, 3.4 percent of businesses with $5 million or less in revenue attempted to raise financing via an online marketplace, compared with only 2 percent of companies that had between $5 million and $100 million in revenue. Clearly the time is right for new innovations in small business lending, and small business owners are ready to think differently about where to get the financing that their companies need.

New Technology is Making Small Business Loans Faster and Easier

Traditional bank lending was often a predictable, rather stodgy affair: you go to the bank, you wait in line, you sit in the office with a banker wearing a nice suit, you fill out applications and paperwork (on actual “paper”)…it’s all very formal, old-fashioned, and “pre-digital.” The new alternative lenders and online marketplaces are putting a fresh face on the small business lending process by bringing a dose of much-needed innovation to the lending process.

New technology is making small business loans easier, faster, and more convenient. According to Fortune, “Tech’s Next Disruption? Small Business Loans,” alternative lenders are using technology to beat the big banks at the small business lending game. Instead of getting denied access to credit by big banks that aren’t interested in lending less than $100,000, small business owners can go online and quickly get approved for short-term loans at rates that are competitive with a traditional bank and often much cheaper than credit card interest rates.

Although alternative lenders make up a small percentage of the small business lending market – only $10 billion out of $600 billion – they are changing the loan landscape by making it possible for small businesses to get approved for loans that big banks might never have bothered with.

The “old days” of sitting in a bank lobby waiting to get approved for a small business loan might be gone for good – but that’s not a bad thing! Even if big banks never resume lending at the same levels as they did before the recession, there are now a variety of encouraging alternatives on the market. And hopefully these new types of small business loans will unleash a wide variety of innovations and new jobs. Only time will tell.