Published on Jan 23, 2018
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Would you support Government-backed business loans?
Small and medium businesses (SMEs) often experience difficulty accessing capital if they don’t have capital assets to back loans with one of the large Australian banks.
The type of finance an SME needs will vary over time. Some SMEs require start-up capital, some need a credit line available to help keep cash-flow going between payments. Or perhaps the business owner wants to expand and needs capital to make the leap.
However, Australian banks are risk-averse, typically lending only to established businesses with several years of business records and with some capital assets to offer as collateral against the loan.
Deloitte Access Economics reported that in 2015, 10% of SMEs in Australia find it difficult to access finance for business expansion. Around 20% of businesses cited lack of access to capital as a barrier to innovation.
Deloitte quoted findings from the NSW Business Chamber, who reported “37% of loan rejections are due to lack of collateral and more than 40% of rejected applications were for amounts less than $100,000, meaning that smaller businesses in particular find it very difficult to assess debt funding.”
In a submission to the Productivity Commission on the inquiry into competition in the Australian financial system, Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell said, “Simply put, banks make less money from lending against strong business cases, good cash flows and so on.”
“Consequently, banks are increasingly not lending to people seeking to buy, expand or invest in a small business unless they have bricks-and-mortar security. This is impacting our economy, job creation and so on, so it would be dangerous for Government to do nothing about this problem. If we want small businesses to be the engine room of the economy, we need more capable business people to be able to access money to invest in businesses.”
To address this gap in lending, Ms Carnell has suggested both the assessment of risk weightings and also to examine the possibility of a Government-backed small business lending fund. The fund would provide SMEs the opportunity to receive a business loan.
There is a rising number of lending-alternatives in Australia. Crowd-sourcing has become a viable source of both funds and investment across Australia, with a number of companies offering a licenced lending platform and online ‘fintech’ (financial technology) companies which may have less stringent lending criteria. However, the interest rates charged by alternative lenders are often higher than the large banks.
Time will tell if the ASBFEO’s suggestion to provide a government-backed alternative will be taken seriously.
Q – Has your business experienced barriers as a result of restrictions to bank funds?
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