Releasing the Affordable Capital for SME Growth report, Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), said that Australian lenders consider SME loans to be high-risk, which has unwanted flow-on effects.
“In Australia, lenders consider SMEs 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,” Ms Carnell said.
“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.”
She said that while the fintech sector is stepping up to provide short-term, low-value finance options to SMEs, there is still a distinct lack of options when it comes to supporting long-term growth.
As such, she made eight recommendations aimed at increasing both the supply of funding and the information available to business leaders and entrepreneurs on their finance options.
“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,” said Ms Carnell.
“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.”
The Institute of Public Accountants (IPA) welcomed the recommendations, which it said demonstrate “the plight of SMEs who struggle to grow their businesses due to the lack of adequate capital, finance and support,” its CEO, Andrew Conway, said.
“Australia must do everything in its power to support small business productivity and growth for the sake of our economy,” said Mr Conway.
“Facts borne from the ASBFEO report such as small businesses’ 57 per cent contribution to GDP and the employment of 7 million people says it all.
“Australia is one of the only countries in the developed world without such a scheme. In our view, a loan guarantee scheme would help increase the availability of much-needed, affordable loan finance to the small business sector.”
Mr Conway claimed that “a limited state-backed guarantee would encourage banks and other commercial lenders to increase loan finance available to small business at affordable rates”.
“Access to responsible and affordable finance will help many small businesses reinvest in their businesses and help create new ideas, new capacity and new jobs,” he said.
Ben Cutler of listed SME lender Scottish Pacific also welcomed the report, particularly the recommendation to devise a financial products guide for business owners.
“SMEs can become ‘rusted on’ to their banks. This means they might not be looking for, or be aware of, other credible funding options,” said Mr Cutler.
“ASBFEO’s report quotes ABS statistics that only 15 per cent of all businesses apply for debt or equity finance, and 90 per cent are approved – with the vast majority of SMEs not even applying for funding.”
“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.”