A $70 billion funding gap is crimping Australian SMEs and with them the wider economy, according to a new report, because traditional lenders still focus on businesses with turnover of $100 million plus.
“If your business has not reached $100 million in revenue yet, you’re probably struggling to access funding for growth,” Johann Kenny, head of risk at asset manager Arowana, wrote in a new report on SME funding.
“It’s a chicken and egg type of problem: to achieve their growth aspirations, businesses need to secure the working capital required for that growth. Traditionally, this capital requirement has to be met through an equity injection from the sponsors and owners.”
According to Arowana, the value of bank loans has risen sharply over the past decade: after easing back to around $400 billion per month following the global financial crisis, the volume of loans has steadily increased since 2011 to around $750 billion.
Yet over the same period, the volume of credit flowing to smaller businesses has risen at a much lower rate, from around $200 billion per month to less than $300 billion.
Looking back since 2006, the difference is even starker. Arowana’s research shows that small businesses have seen monthly lending volumes not quite double, rising by around $100 billion. Bank lending to large firms, however, has almost trebled, rising from around $250 billion to around $750 billion.
“This is not just a problem that businesses face with the major banks. Regional banks and challenger banks are vying for a client base that fits the real property security mould,” the report said.
“Cash flow-based loans for small business come in either very small packages [or] subject the borrower to very restrictive covenants.”
This, the report calculated, is leading to a funding shortfall for the small business community of more than $70 billion.
It said that asset-based fintechs in particular are stepping up to support small businesses and address the funding gap, with hopes that the federal government’s $2 billion Australian Business Securitisation Fund will further increase the amount of credit made accessible to SMEs.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.