Band-aid business loans disguise wider issues

by Melanie Mingas01 Oct 2019

Small and medium sized enterprises are stacking loans to the detriment of their business, due to the low awareness of debt-free alternatives among brokers and SMEs.

The observations, made by Fifo Capital CEO Wayne Morris, highlighted the ongoing impact of low levels financial literacy among more than two million SMEs.

According to the ASBFEO, in 2018 up to 45% of small businesses were not using accountancy software to maintain up-to-date and accurate financial records. Further, the RBA reported that lenders are concerned about the “relatively low level of financial capability among small businesses applying for finance”.

“I think there is still quite a lag in understanding new solutions for solving SME finance problems and there is a big learning curve still to go,” Morris told Australian Broker.

“Although there is a lot of choice, I think the loan space has some problems on the horizon and providing loan after loan will cause issues. There is a lack of caution in providing loans. A business loan, to a degree in many cases, is a band aid over a bigger problem. It’s not actually solving it,” he added.

Elaborating, Morris reported SMEs use loans to pay bills without ever questioning why they don’t have the working capital to cover overheads.

To help tackle the issue, Fifo Capital recently engaged in an extensive research project with brokers and business owners and will use the findings to support a market education drive.

“Because of that research we can now evidence what we are saying so next we are going to help wean the market off this thought process of constantly providing loan after loan,” Morris said.

The next 12 months will see Fifo Capital place a strong emphasis on industry education, driving awareness around alternative solutions including supply chain finance and working capital.

“For brokers it’s about really understanding the financial make-up of the SME. There are so many loan providers and you can get loan after loan but we want to help our brokers to be able to actually solve the problems for our clients,” Morris said.

“As a broker, simply offering a loan that a business could get for themselves on the internet with no other innovation, isn't going cut it in the future,” he added.

There will be more on this story in Australian Broker issue 16.20