Recommendations to grow SME lending

by Rebecca Pike03 Jul 2018

A specialist lender has welcomed new recommendations from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to help increase the supply of capital to SMEs for growth.

Ombudsman Kate Carnell released the Affordable Capital for SME Growth report last week (29 June) with eight recommendations, which would also help to raise SME business owners’ awareness of alternative sources of finance outside traditional banking.

The inquiry followed the group’s Barriers to Investment study last year, which identified a funding gap where SMEs do not have access to the finance they need to start or grow their businesses.

Scottish Pacific consulted with ASBFEO for the inquiry and said the report is “very welcome”.

The lender’s chief customer officer Ben Cutler said there could often be a danger of SMEs becoming “rusted on” to their banks. The report referenced the current poor level of awareness by business owners about funding options.

He highlighted ASBFEO’s plans to develop a financial products guide so that business owners know what funding options are available and best suited to them.

The Affordable Capital for SME Growth report points out that the banks’ risk-weighted appetite, focused on real estate, limits the lending available to Australia’s SMEs.

It states that home ownership between ages 25-34, is down by more than 30% over the past 25 years. With some forecasters expecting housing markets to decline this could have a major impact on business owners’ ability to access funds.

Cutler said, “Scottish Pacific has a 30-year history of funding thousands of business owners’ growth aspirations, with a style of funding that doesn’t put the family home at risk.

“So, it is frustrating to think that 65,000 businesses, more than 95% of the eligible market, could benefit from this style of finance, yet many are not aware of the option. Along with government and industry bodies, we’re trying to change this situation.

“It’s great for business owners to have wide funding choices and any effort the ombudsman makes to put more options in front of SMEs, such as an SME Guide to Financial Products, is very welcome.”

About releasing the report, ombudsman Carnell said, “In Australia, lenders consider SME’s high risk and offer capital with restrictive terms and conditions, at high interest rates and demand bricks and mortar as security, which is usually the family home.

“Unfortunately, the unintended consequences of the financial services royal commission for SMEs might be an increase in banking regulation, making it even more difficult for them to access affordable growth capital.

“I regularly remind people that SMEs are the engine room of the economy, but the engine won’t work without petrol, which is seed capital and growth finance.

“We have made eight recommendations outlining initiatives to increase the supply of capital, and inform and prepare SMEs to be finance ready to address the market failure.

“On the supply side, we recommend establishing a Business Growth Fund based on the British model, to focus on long term funding solutions for SMEs that have the capability to grow.

“Another is an Australian Government Guarantee Scheme. Under the scheme member banks can apply for a government guarantee to partially support a loan to SMEs with a strong business case but insufficient real estate or business assets.

“On the demand side, our recommendations include initiatives to help SMEs prepare their business to seek capital, and raise their awareness of alternative sources of finance outside traditional banking.”

 

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