News.com.au reported that a staggering 2,349 construction firms have collapsed in the past year – with fears more may fall soon.
A “perfect storm” of high interest rates, soaring material costs and an ongoing worker shortage across the Aussie industry have sent tradies into freefall.
Insolvencies in the construction industry have reached an annual record this year, according to fresh data published by the corporate regulator ASIC. The September quarter was the worst for the industry in 2023, where 785 construction businesses traded as insolvent. Just this month four building companies went bust in the first three days of the month.
And amid a chronic shortage of housing fuelled by Australia’s record overseas migration intake, the collapse of builders, contractors and subcontractors will not only have an immediate impact but could crimp future supply of new homes.
We look in more detail at the numbers…
http://www.martinnorth.com/
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants.
A quick on the road update from our Property Insider, who reports on mortgagee in possession sales – emanating from the small business and property investor sectors.
Go to the Walk The World Universe at https://walktheworld.com.au/
I caught up again with Melbourne based Business Consultant Peter Solanikow from Bizne$$ Crew who had another timely and sobering message about small business should manage things in these uncertain times.
SmarterLite’s Chief Technology Officer, Zoran Ovuka, explains the innovation journey the company has been on as it has created a next generation luminosity product. https://smarterlite.com/.
Proof Australian firms have the capacity to be innovative, despite the many barriers in play.
Go to the Walk The World Universe at https://walktheworld.com.au/
Business Broker Eddie Pampalian from Network Infinity joins me to discuss the plight of SME’s based on his experience dealing with a wide range of small and medium businesses.
This release provides information on the prevalence and nature of adverse impacts from COVID-19 experienced by businesses operating in Australia in mid-March 2020.
Approximately half of the Australian businesses surveyed (49%) had experienced an adverse impact as a result of COVID-19 during the mid-March data collection period and 86% of businesses expected to be impacted in future months. The collection period pre-dated the Australian Government’s announcement of Phase 1 Social Distancing Measures.
Adverse impacts were most prevalent in Accommodation & food services with over three quarters of businesses (78%) already reporting impacts and 96% of businesses reporting that they expected impacts in coming months. Businesses in Professional, scientific & technical services (21%), Electricity, gas and water supply (34%) and businesses in Mining (37%) were the least likely to have been adversely impacted by COVID-19 in the collection period.
A reduction in local demand was the most common impact experienced (82%) and was also the most common impact expected in coming months (81%). Of impacted businesses, over a third had experienced staff shortages (36%) and 59% expected to experience staff shortages in coming months.
Tens of thousands of small businesses are facing imminent collapse as revenues tank and they run out of cash. Urgent action is required to avert the disastrous consequences which will follow.
Sensible government intervention like travel bans should flatten the coronavirus curve but we need to also need to flatten the curve of small business insolvencies. Unless they get through the next few weeks, a massive number will not be around when the inevitable recovery takes place.
Banks have a crucial role to play but there is only so much they can do. We should not expect banks to simply offer an open cheque book because that would not be responsible lending. No lender can or should lend to a small business which has no or drastically reduced revenue. So what are the banks saying and more to the point what can they actually DO in this situation?
This is what ANZ’s Shayne Elliot has to say…..
And from NAB’s Ross
McEwan…..
There is a general acceptance that post Royal
Commission the banks are trying harder to be good corporate citizens and they
have all since signed up to the Code of Banking Practice that includes a
section on “When things go wrong” but all the codes and commitments in the
world are of little comfort to small business owners right now when time
is of the essence and if they don’t have:
– A manager they can talk to.
– Time to prepare a loan application and wait for an approval.
– Profits which can be offset by tax breaks.
– Term deposits to access.
– The demand to justify new investment (unless they are a toilet paper
manufacturer).
What they need is liquidity
and if there is one lesson from a career in banking it is that “Cash is king”. This
is as true today as it was after the stock market crash of 1987.
In 1987 we saw the collapse of asset values, predominantly equities, today we
are facing a dramatic economic downturn which is causing a cash flow crisis
that is a particular threat to thinly capitalised small businesses. The only
effective solution is to quickly get cash into their hands. And the only party
which can pay for this is the federal government which means the taxpayer. The
challenge is how to do this in a very short period of time.
In hindsight everything is always much clearer but the truth is we have missed
the boat when it comes to establishing a government agency that could perform
this function. This 2015 newsletter reveals how USA’s Small Business Administration has successfully
funded the small business sector for over 60 years.
Whilst for years the US and
the UK have wholeheartedly and very successfully committed taxpayers funds to
support small businesses, we have just begun dipping our toe in the water
with programs like the $2b Australian Business Securitisation Fund and the
Australian Business Growth Fund which is funded by the banks to the extent of
$540m.
We are now paying the price for this lack of foresight and commitment but that
aside, we must find a way to quickly get cash into the hands of small
businesses.
THE SOLUTION?
The government provides a guarantee to enable approved lenders to grant
registered businesses interest free loans up to $50,000 for a period of 12
months. Parameters that would need to be worked out include:
– Definition of an ”approved” lender eg non-banks, challenger banks,
fintechs etc.
– Amount (should it be more or less than $50,000?)
– Term (should it be more or less than 12 months?)
– Amount of government guarantee so the lender has some risk.
– Repayment terms and arrangements at maturity including potential for
rolling over.
– Size and reputation of borrower (employees/turnover, ATO compliant
etc.)
In broad terms, if there are 600,000 small business owners that qualified and
every one took out a $50,000 loan and every single one defaulted, it would cost
the taxpayer $30 billion.
Given that the coronavirus crisis will end up costing the country many times
more than this sum, the question for our Government is “what price do we put on the small
business sector?”
In mid-February around 1-in-6 Australian businesses (15%) have already been affected by the coronavirus, also known as COVID-19. This new threat to business comes after over a quarter of Australian businesses (28%) said they have been affected by the extensive bushfires over the last few months according to a special Roy Morgan Snap SMS Survey of 1,170 Australian businesses.
Coronavirus hits Education,
Manufacturing and Wholesale industries hard
A little over a week after the Australian
Government stopped all direct commercial flights to China in early February the
coronavirus (COVID-19) is already striking several industries.
Around two-fifths of Manufacturers are already
reporting being affected and closely followed by a third of Education &
training businesses and those in the Wholesale industry.
Other industries to already be feeling the
effects of the coronavirus include Accommodation & Food services which
includes travel and tourism businesses, Community services, Administrative
& Support services and Property & Business services.
Respondents to the survey described in their own words the impact the coronavirus was already having and these responses fell into a few broad categories including the issue of workers, or students, being quarantined and kept away from work/study; the impact on supply lines for the import or export of goods and parts to and from China; the decline in forward bookings from Chinese tourists and cancellations by customers in Asia as well as the general hit to confidence which includes a weaker stock-market as well as lower foot traffic in stores due to a combination of the aforementioned.
Bushfires/Floods strike
Tourism, Retail and Property & Business services industries
A deeper analysis of the industries most
heavily impacted by the bushfires/floods shows that over 40% of businesses in
the Accommodation and Food services sector, which includes travel and tourism,
say they have been affected either ‘A great deal’ or ‘Somewhat’.
Around a third of businesses in the Retail and
Property & Business services industries have been affected while there have
also been disproportionately large impacts on Manufacturing, Transport, Postal
and Warehousing, Public administration & defence, Education & training
and Recreation & personal.
Businesses in the East Coast States of Victoria
(39%), NSW (31%) and Queensland (23%) have been the most heavily affected by
the bushfires/floods. In contrast only 14% of businesses in Tasmania and 11% of
businesses in both South Australia and Western Australia have been affected at
all.
Further details on how the recent bushfires
affected Australian businesses can be found here.
Roy Morgan Chief Executive Officer
Michele Levine says the long bushfire season has finally ended with
drought-breaking rains in recent weeks however the new threat of coronavirus is
a growing threat to the recovery of the Australian economy:
“The new threat of coronavirus (COVID-19) that
has emerged in recent weeks is already hitting the business community in much
of Australia – and in several states including Western Australia, South
Australia and Tasmania – has already had a bigger impact than the bushfires..
“The Australian Government halted all flights
from China in early February and that ban is still in place on a week-to-week
basis as the spread of COVID-19 in China is being monitored.
“Already feeling the effects are Manufacturing
businesses which rely on China for the importation of many parts, Education
& training – China is the largest source of foreign students in this $35+
billion industry and Wholesale which imports many goods manufactured in China
for sale at Australian retail outlets.
“The Tourism industry is also in the firing
line as Chinese tourists (the largest inbound tourism market) are barred from
visiting Australia until further notice. In addition, the all-round impact of
the coronavirus is having an increasing impact on general confidence which in
turn has a negative effect on retail foot traffic. We’ve already seen
restaurants close due to the decline in customers particularly in places
heavily reliant on Chinese-owned businesses such as Chinatown.
“It is hard to predict exactly how the full
impact of the coronavirus will be felt in the Australian economy over the next
few months although it’s safe to say that the negative economic ‘shock’ is set
to grow after outbreaks of the virus have been seen in such diverse places as
South Korea, Iran and Italy over the last few days.”
Businesses affected by the bushfires/floods cf. coronavirus
around Australia by State
Source: Roy Morgan Special
Snap SMS Poll of Australian businesses in February 2020, n=1,170. Base:
Australian businesses.
We discuss our submission to the Senate Inquiry into funding for the SME sector. The proposed bill will provide incentives for the big banks, but do little to address the real issues. We offer an alternative approach, using data from our SME surveys.
We are pleased to offer our submission for consideration.
The Bill as proposed will do little to address the underlying SME funding
issues we have in Australia, despite benefitting the incumbent major investors
through their equity shares. It might play well from a “we are doing something
for SME’s” perspective, but in reality, it will do little.
To address the real problem of SME funding, we recommend
a FinTech style structure, as already proven in the UK and elsewhere across
Europe. This would enable the allocated funds to reach more businesses, but
more importantly also facilitate a transformation of lending to the SME sector
in Australia, including driving incumbents to lift their game.
This transformational play would demonstrate the
Governments active support for the SME sector, but also lead to broader and
deeper change, to the benefit of the local economy.
Introduction
Digital Finance Analytics is a boutique research and
advisory firm which curates a rolling 52,000 firm survey each year, with ~4,000
new firms added each month. The survey is a telephone omnibus and is executed
on our behalf by a reputable service bureau. It is statistically accurate
across the country.
We design the questions, and analyse the results using our
Core Market Model. The survey has seen running for more than 15 years. We have
several clients who subscribe to our data services, as well as those to receive
copies of the free summaries. Clients include several financial services
companies, FinTechs and Government agencies, within Australia and beyond.
We hold information about their business structure, banking
relationships and financial profile, as well as their digital behaviour. This
provides a multi-factorial basis for our underlying segmentation[i],
which has proved to be both stable, and insightful over time.
There is tremendous diversity in the SME sector, and as a
result one size certainly does not fit all. We believe strong segmentation is
essential to be able to translate strategy into effectively action. We focus on
what we call “the voice of the customer”.
This enabled us to develop models and descriptors for each
of the clusters. Businesses are placed within the model descriptions in a
best-fit manner. We believe that the results should be judged largely on the
interpretability and usefulness of results, not whether the clusters are “true”
or “false”.
When these stable segments are cross-linked with our
research, we can compare the different needs and opportunities across the
groups, and we can prepare segment specific treatment plans for each.
The custom segmentation we use is well distributed by count
across the business community. Growing business and Cash Strapped Sole Traders
are the two largest groups. As expected, the count of Large Established Firms
is the lowest.
In the light of our research, we have reviewed the
provisions of the proposed legislation and wish to make three major points.
SME’s Are Indeed an Essential Part of Our Economy.
The small and medium business sector (SME) is a critical
growth engine for the economy, with more than 3 million businesses offering
employment for more than 7 million Australians. The characteristics of these
businesses are varied from newly founded part-time entities, through to
businesses employing up to 100 people and with a turnover of up to $10 million
each year. More than 77% have a turnover of less than $500,000 each year. 91.3%
have an annual turnover of less than $2 million each year. So, one size does
not fit all.
The largest industry segment is Construction (17%), followed
by Professional, Scientific and Technical (12.5%) and Rental, Hiring and Real
Estate Services (11.5%). Financial Services (9%) and Agribusiness (8.25%) are
the next two. Note that Mining accounts for only 0.4% of all SME’s.
Nearly half of all businesses have been trading for less
than 4 years. Cash Strapped Sole Traders are most likely to fail (55% in 5
years), followed by Cash Strapped Sole Traders and Stable Subcontractors. The
highest failure rates are found in Transport, Financial Services, Real Estate
and Construction.
Most SME’s are true small businesses and one quarter of
SME’s have a sales turnover off less than $50,000 each year, and more than half
have a turnover of less than $150,000 per annum. Most low turnover businesses
are unincorporated. Those businesses with larger turnovers are more likely to
be formed as a company.
Looking at the state distribution, 60% of businesses are in
NSW and VIC.
Funding Is Indeed A Growing Problem for SME’s.
We have detected an increasing problem where more businesses
are unable obtain suitable finance to enable them to grow and invest in their
businesses. Underlying this is the fact
that demand from households and businesses for services from the SME sector is
waning as the broader economy falters. SME’s are the canary in the economic
coalmine!
For many segments, the need for working capital is the main
issue, and the main cause of this need relates to delayed payments. This is
particularly a concern among some smaller businesses. The average debtor days
is still elevated, with 45% of firms reporting an average settlement time from
invoicing of 50-60 days. There were minor variations across the states. Debts from Large Corporates and Government
entities are both taking longer to settle due to “enhanced” cash flow
management techniques.
The average number of banking relationships varies across
the segments. Larger and more complex businesses are likely to spread their
relationships. Others, in need of funding, will also try to access facilities
from many sources, and so have more complex relationships.
Satisfaction with banking services remains in the doldrums,
with around half of all businesses dissatisfied, or very dissatisfied with
their bank, and only 17% very satisfied.
The satisfaction rating did vary by segment, with more established
firms who do not need to borrow the more satisfied, while newer smaller firms,
seeking to borrow, the least satisfied. For them access to credit was a
significant issue.
Compliance and price were the two most significant causes of
dissatisfaction, though only 5% said obtaining funding was the root cause of
their concerns. When asked about their propensity to switch lenders, 61% said
they would consider moving. However, when we examined their length of time with
existing banking relationships, many are rusted on long term. The inertia, and
the gap between intent to switch and switching is explained by a combination of
time constraints, complexity of switching and lack of available alternatives.
Again, this footprint varies by segment.
We continue to see the rise of FinTech lenders operating in
Australia. Around 23% of SME’s have applied, and a further 10% say they will
apply for funding. Overall awareness is rising, although there are some
concerns about the true costs of borrowing from this source.
Many lenders are reluctant to lend to the sector, require
security (mortgage over property for example) and funding is expensive. Banks
prefer to lend to households as opposed to businesses, partly because of the
relative capital ratio costs and lower risk profiles.
Some businesses are turning to the growing FinTech sector,
where unsecured finance is available, at a price, but getting funding through
these channels can be expensive because of lack of true competition and high
demand.
Finally, we agree with the proposition that Australia
currently lacks a patient capital market for small and medium enterprises. But this is not the main issue blocking the
growth of the sector. Access to straightforward credit is.
But the Proposed Bill Is Targeting the Wrong SME Segments
We understand the fund will invest between $5 million to $15
million in small and medium enterprises that have a turnover of between $2
million and $100 million, where they can demonstrate three years of revenue
growth and a clear vision to expand.
Established Australian businesses will be eligible to apply
for equity capital investments between $5 million and $15 million.
Small-business owners will not have to give up control for this investment.
The Business Growth Fund’s investment stake will range from
10 to 40 per cent, setting a balance between business owners keeping control of
their business and providing enough incentives for investors. Initially, the
Business Growth Fund could support 10 investments per year, with the aim to
increase to 30 per year as the fund develops. Banks and superannuation
contributions could enable the fund to grow to $500 million.
Our research indicates that this particular segment is
small, can already obtain funding for such expansion (many would fit within our
“Business In Transition” segment), and as a result we do not believe many would
be prepared to give up such a large stake in their growing businesses. It seems
this is more orientated to offer investors and the financial sector a return,
than being shaped best to provide support for those small businesses which need
assistance the most. The small number of transactions envisaged will also not
assist many businesses, and the target is clearly not the bulk of those with
real funding needs.
Thus, we cannot support the current proposal (which we also
note is imprecise in terms of the assessment processes, return hurdles and
other matters). Our view is that the current proposal appears rushed, and too
high-level. But our main point is, it is targeting the wrong SME’s.
We Think There Is A Better Option
We believe there is a better option to assist SME’s in their
growth agenda. The truth is there is a dearth of financing available from
existing major players. Their risk and capital ratios mean they prefer to lend
to households for mortgage purposes, then to small business. As interest rates
fall, this pressure is being exacerbated.
We think a better model would be to provide funding via the
emerging Fintech sector, by either providing funding to flow to existing FinTech’s,
or by creating a new Government backed marketplace where FinTech’s and SME’s
can transact.
There are good examples of such models[ii].
For example, in the UK, the main contenders are Tide (focused solely on SMEs,
small or medium-sized companies) and Starling (which has retail accounts as
well). In France, the big player is Qonto. In Germany, there’s Penta and Hufsy
(which is based in Denmark). In Norway, Aprila. For “micro-businesses” of 1-10
people, there’s Holvi in Finland, Coconut, Anna and CountingUp in the UK, and
Shine in France.
Tide now claims over 1.4% of the UK’s SMEs as clients (up
from 1% in December 2018), and is gunning for 8% market share by 2023, aided by
a £60m UK government grant.
Meanwhile, Starling has 46,000 SME members, up from 30,000
in March, with £100m from the same government grant to develop its business
banking offering.
Qonto in France has grown from 15,000 small business
customers to 40,000 in the past year, and is expanding into Germany, Spain and
Italy this year. Finnish startup Holvi, which was bought by Spanish bank BBVA
in 2016, claims 150,000 customers and is expanding into France, Italy, the
Netherlands, Ireland and Belgium.
There is a lot of space for growth because the European
market — with 24.5m SMEs — is still extremely dominated by the big lenders. In
the UK, for example, four big banks have a 90% share of SME banking.
This was an intentional strategy from the UK Government to
disrupt the inadequate SME sector. And in response the incumbents have been
forced to respond and are now upping their game and starting their own
digital-focused business banks as well to compete. In November 2018, NatWest
launched Mettle. Santander’s “start-up” small business bank, Asto, also
launched in the UK late 2018 Meanwhile, HSBC is building its own small business
bank start-up, known internally as Project Iceberg.
In addition, the cost of funding to SME’s has dropped and
the Fintech sector has developed, supported by the core injection of UK
Government funding.
These digital plays cover a wide range of services which
SME’s need, as well as basic payments, transactions and lending. And they are
tending to create a marketplace where businesses and service providers and
lenders can interact. This is transformational.
The SME experience has been significant, with easier access
to funding, faster decisions, and the resultant rebalancing of the industry has
lifted mainstream lenders too. If a similar model was replicate here, the SME
sector would win. Australia would win.
Conclusion
The point to make, is rather than a thin deal flow
targeting larger SME’s which really do not need assistance, a revised strategy
could facilitate transformation of finance to SME sector. Thus, the planned investment
could be made by the Australian Government, but leading to more productive
outcomes. If we were to replicate a UK model, we think it should be the current
inflight Fintech-based approach, rather than one which favours incumbents, and
which does not deal with the core issues Australian SMEs face.
Thus, we recommend that the current proposed Bill is
withdrawn, and the strategy redeveloped to take account of the emerging Fintech
scene
Martin North
Principal
Digital Finance Analytics
9th February 2020
[i] Our
partitional clustering approach means that the segments are defined using multi-factor
cluster analysis and split into non-overlapping tribes, rather than in a
hierarchical tree. To achieve this, we developed a proprietary scoring system
based on Lloyd’s algorithm, (also known as Voronoi iteration) for grouping data
points into a given number of categories. This is often referred to as k-means
clustering. The modelling is iterated sufficiently to enable adequate
separation between clusters, as determined by Lloyds’s algorithm.