Small-mid sized business (SME) finance is critically important to the future of all Australians

SMEs, employing up to 200 staff each,  employ 70 per cent of the Australian workforce, have a disproportionately high number of senior women and enjoy higher survival rates in South Australia and Tasmania than other states.

The sector is a vital part of the Australian economy with around two million SMEs representing more than 99.7 per cent of actively trading businesses.

The challenges for ambitious Australians growing a business today are many. The biggest challenge is financing your growth.

As written by Alan Kohler, one of our most insightful commentators:

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.
As George says, cutting rates will be useless unless the banks lend to businesses, but they can’t do that because they are caught between the regulator’s demand for more capital and the market’s demand for more ROE.

The Facts


Our most powerful sector: the Australian mid-size business employing 3.7 million Australians

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.”


Banks are withdrawing from SME finance worldwide:

  • 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)   

Again Alan Kohler sums it up succinctly:

Banks are no longer very interested in creditworthiness, or in establishing the sustainability of small business’s cashflow — they just want the security of the entrepreneur’s house.
The result, apart from the well-documented dearth of business investment in Australia, is that two new industries are now beginning to flourish in Australia: non-bank lenders focusing on the personal loan and small business sector and venture capital.
Increasingly entrepreneurs are being forced to raise equity capital to fund their working capital, in the absence of either a business loan or an overdraft, which means selling part of their businesses.
And that is expensive capital, both in the returns that the venture capitalists expect and in the emotional wrench of equity dilution.
So the shifts in bank regulation — more capital and the risk weighting of assets — is actually having a profound effect on the way business itself is conducted.
And the growth of peer-to-peer lenders like Society One, Ratesetters and ThinCats (in which I am a small investor) is a direct consequence of the banks withdrawal from unsecured lending.

The baby-boomer exit tsunami

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).

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