How To Jump-Start SME’s

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.

Inquiry into the Australian Business Growth Fund Bill 2019 [Provisions] – Submission

Summary

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

9^th 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.

[ii] https://sifted.eu/articles/sme-small-business-banking-startups-europe-compared/

‘Premium’ SME Borrowers Are Bad News

Underestimating the appetite of premium quality borrowers has led to a revenue downgrade for fintech business lender Prospa and a 28 per cent reduction in its share price. Via InvestorDaily.

Prospa shares crashed 27 per cent to a record low of $2.80 on Monday morning following the release of the group’s trading and guidance update.

Prospa has revised its revenue forecasts down by 8 per cent to $143.8 million from the $156.4 million as advertised in the company’s prospectus. Prospa floated on the ASX in June with an IPO price of $3.78 and rallied almost 20 per cent in day of trading, lifting the company’s market cap to $720 million.

However, following this week’s trading update, the company is now valued at $450 million. Sales and marketing expenses are forecasted to be $80.1 million for the calendar year, up 5.5 per cent from the $75.9 million forecast in the prospectus.

EBITDA is forecast to take a 62 per cent hit from $10.6 million to $4 million.

Prospa stated that the downward revision to its revenue predictions is largely due to its “premiumisation strategy exceeding our forecast”. Premiumisation is traditionally a strategy employed by companies to make consumers pay more for a product by promoting its exclusivity. But for a small business lender like Prospa, premium customers are actually less profitable.

“While we continue to grow our lending to all credit grades, we are seeing increased appetite for our solutions from premium credit quality customers who pay lower interest rates over longer terms,” the company said.

Prospa said its strategy to optimise its cost of funding has facilitated lower rates for customers and broadened its customer base and appeal – allowing the company to tap more of the $20 billion addressable market.

“The introduction of a new rate card in early April was more successful than anticipated, with approximately 43 per cent of Prospa’s portfolio now represented by premium customers,” the company said.

“The evolution in book composition towards premium grades has led to a short-term impact on revenue, despite the positive impact premiumisation has had on market penetration, operating leverage, funding diversity and portfolio resilience.”

Lending rates to premium customers are lower than the average book rate and the loan duration is longer. In the four months to 31 October 2019, the average simple interest rate on Prospa’s book has adjusted to 18.5 per cent compared to the prospectus forecast at 18.9 per cent and average loan term has increased to 14.6 months (Prospectus at 14 months).

Early indications are that the static loss rates in the growing premium section of our loan book are well below 4 per cent, which is the bottom of the risk appetite range.

Greg Moshal, co-founder and joint CEO of Prospa, admitted that the lender is experiencing some short-term impacts on its forecasts, but said he remains confident Prospa has the right growth strategies to deliver long-term shareholder value and solve the funding challenges of small business owners across Australia and New Zealand.

“Originations are growing,” he said. “Portfolio premiumisation means a higher quality loan book and lower rates and longer average terms for our customers. Early loss indicators continue to improve and we expect to continue to invest in new products, sales and marketing.”

Alt Funders Overtake Banks As SME Cash Flow Is Stretched

A new trend has emerged in the SME lending space, with Australian small businesses more likely to use a non-bank to fund growth rather than their main bank, according to a national survey, via Australian Broker.

Small business owners’ reliance on non-banks is the highest it’s ever been, with 18.7% of SMEs planning to fund revenue growth with such a lender, as charted in the September 2019 SME Growth Index commissioned by Scottish Pacific and drawing data from over 1,000 businesses.

Conversely, business owners planning to fund their growth via their main bank has halved, dropping from 38% in the first year of reporting in 2014 to 18.3% in the most recent data.

The main reason given for turning away from banks, cited by 21.3% of the SMEs, was avoiding having to use property as security against new or refinanced loans, up from 18.7% in September 2018.

Other considerations contributing to the gravitation towards non-banks included reduced compliance paperwork (19.8%), short application times (17.1%), royal commission disclosures (8.8%) and banks’ credit appetite (6.9%).

Of the SME owners relying on non-bank funding, 77% utilise invoice finance, 23% merchant cash advances, 10% peer to peer lending, 9% crowdfunding and 5% other online lending.

Just 2.6% of those surveyed indicated they would not consider using a non-bank lender – down from 4.0% last year.

“[However], the SME sector still has a long way to go in taking advantage of the alternatives available to them,” said Peter Langham, Scottish Pacific CEO.

“Some business owners remain unaware of funding alternatives. [They] are aware of non-bank funding, but don’t fully understand how it works.

“They are too busy to research it, so put this in the ‘too hard’ basket. When they can’t secure bank funding, they just tip their own money in to fund growth.”

For growth SMEs, almost twice as many as in H1 2018 say their cash flow is
worse or significantly worse (21.2%, up from 12.3%). At the same time,
non-growth SMEs reporting worsening cash flow has increased to 17.6%, up from 10% in H1 2018.

According to the survey, 83% of business owners plan to stimulate revenue growth with their own funds.

ASIC sues Bendigo and Adelaide Bank for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against Bendigo and Adelaide Bank concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bendigo and Adelaide Bank in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bendigo and Adelaide Bank in these contracts.

ASIC alleges that certain terms used by the Bendigo and Adelaide Bank and are unfair, as the terms:

cause a significant imbalance in the parties’ rights and obligations under the contract;
were not reasonably necessary to protect the Bendigo and Adelaide Bank’s legitimate interests; and
would cause detriment to the small businesses if the terms were relied on.

Some of the unfair terms pleaded by ASIC include clauses that give lenders, but not borrowers, broad discretion to vary the terms and conditions of the contract without the consent of the small business owner, along with clauses that allow the bank to call a default, even if the small business owner has met all of its financial obligations.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

If the Federal Court finds that any of the terms of the standard form contracts are unfair, the unfair terms are void (it is as if the terms never existed in the contracts). ASIC is seeking that the terms are declared void from the outset – not from the time of the court’s declaration. The remainder of the contract will continue to bind parties if it can operate without the unfair terms.

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

With effect from 12 November 2016, the unfair contract terms provisions applying to consumers under the Australian Consumer Law and the ASIC Act were extended to cover standard form ‘small business’ contracts.

Small businesses, like consumers, are often offered contracts for financial products and services on a ‘take it or leave it’ basis, commonly entering into contracts where they have limited or no opportunity to negotiate the terms. These are known as ‘standard form’ contracts. Small businesses commonly enter into these ‘standard form’ contracts for financial products and services, including business loans, credit cards, and overdraft arrangements.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

the contract is for the supply of financial goods or services (which includes a loan contract);
at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

Identifies the types of terms in loan contracts that raise concerns under the law;
Provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law

ASIC sues Bank of Queensland for use of unfair contract terms

ASIC has commenced proceedings in the Federal Court of Australia against the Bank of Queensland concerning unfair contract terms in small business contracts.

ASIC alleges that certain terms used by Bank of Queensland in contracts with small businesses are unfair. If the Court agrees with ASIC, the specific terms will be void and unenforceable by the Bank of Queensland in these contracts.

ASIC alleges that certain terms used by the Bank of Queensland are unfair, as the terms:

cause a significant imbalance in the parties’ rights and obligations under the contract;
were not reasonably necessary to protect the Bank of Queensland’s legitimate interests; and
would cause detriment to the small businesses if the terms were relied on.

ASIC is also seeking a declaration from the Federal Court that the same terms in any other small business contract are also unfair.

Background

Since 1 July 2010, ASIC has administered the law to deal with unfair terms in standard form consumer contracts for financial products and services, including loans.

The unfair contracts law applies to standard form small business contracts entered into, or renewed, on or after 12 November 2016 where:

the contract is for the supply of financial goods or services (which includes a loan contract);
at least one of the parties is a ‘small business’ (under the ASIC Act, a business employing fewer than 20 people is a ‘small business’); and
the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In March 2018, ASIC released Report 565: Unfair contract terms and small business loans. The report:

identifies the types of terms in loan contracts that raise concerns under the law;
provides details about the specific changes that have been made by the ‘big four’ banks to ensure compliance with the law; and
provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the UCT law.

SMEs continue to struggle with cashflow

Australian SMEs are still suffering as 70% of brokers agree that cashflow is “definitely more” of a problem to small businesses now compared to 12 months ago. Ninety-two percent of them believe finance is “more difficult” to access after the Banking Royal Commission, according to a recent poll of the broking community commissioned by B2B finance provider Apricity Finance; via MPA.

With the increased need of finance worsened by the increased challenge of accessing it from tier one banks, the royal commission almost created a “perfect storm scenario” for small businesses, Apricity Finance CEO Linden Toll said.

Working closely with finance brokers, Toll and his team believe brokers have “a unique view on businesses”.

“Like the canary in the coalmine, the trends that brokers see across the SME sector can often be indicative of longer-term problems,” he said.

The research also revealed the broker community found businesses with a yearly turnover of less than $5m, which is the majority, are the ones likely to face cashflow problems. According to Toll, 68% of survey respondents believe that those problems are mainly caused by late invoices and long invoice payment terms.

“Small businesses are hugely important to the Australian economy and employ more than four and a half million Australians, more than those employed by the whole of the ASX 200,” he added.

The findings of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in their report in April 2019 echoes Toll’s sentiment. The ombudsman’s head and ex-chief minister for the ACT Kate Carnell stated in the report that they’ve “received over 2,400 surveys from small and family businesses across the country raising issues on late payments and long payment times”.

“Where large corporations delay payment to their small business suppliers, small business cash flow is unpredictable and presents significant difficulties in their ability to access and service finance. Cash flow is king to small business — poor cash flow is the primary reason for insolvency in Australia,” Carnell said.

Linden and his team recommend that small businesses that think cashflow is becoming an issue to act early and take the needed steps to make sure they don’t fall into the 40% of businesses that don’t reach their fourth year

Property downturn bites business owners

Almost half the SMEs (44.5%) say property market conditions are already making it harder for them to access business funding, likely due to softening house prices in major markets, according to the latest Scottish Pacific Business Finance report, based on research by East & Partners who interviewed 1,257 SME businesses with annual revenues of A$1-20 million over a seven-week period ending 18 January 2019.

Of course this is a relatively narrow segment of the SME market, as many will have significantly lower turnover.

The report said that a further 35% haven’t yet felt the impact, but fully expect the housing price correction and broader property market conditions
including slowing loan approvals will have a significant impact on their borrowing capacity.

When property market impact was last assessed in September 2017, three out of four SMEs said property prices were having no direct impact on their businesses. This round, only one in five SMEs said they had not yet seen a direct impact.

This minority of non-affected SMEs perhaps reflects how broad the base of Australia’s small business sector is, with more than two million enterprises across a wide range of industries and regional markets.

Property prices are having more impact on SMEs in Victoria and NSW (affecting 48% and 46% respectively), with Queensland small businesses (39%) the most buffered.

Declining or no-change SMEs are being hit harder by property market movements, with 54% of non-growth SMEs already impacted (compared to 36% of growth SMEs).

For these non-growth SMEs, finances are already stretched thin and they are feeling “when it rains it pours”. These are the businesses that currently need the most support to get through tough market conditions.

More than 91% of SMEs would be prepared to pay a higher rate to obtain finance if they didn’t have to provide real estate security. This overwhelming sentiment is voiced at a time when a sharp correction in residential property prices is affecting capital cities, coupled with falling building approval data and predictions by analysts such as Core Logic and UBS of tough market conditions still to come.

Of the nine out of 10 business owners who say they would be willing to pay a higher rate for finance if they could avoid using property as security, almost two-thirds (65%) indicated they ‘definitely’ would be willing, and more than a quarter (26%) said ‘probably’. Fewer than 1% of SMEs ‘definitely’ would not consider higher rates in place of borrowing against the family home, and just over 1.5% said it would be ‘unlikely’.

According to the Productivity Commission’s draft report into Australian financial system competition, a third to a half of Australian SME loan value is reliant on property security. For the major banks, 35% of their
small business lending (by loan value) is secured by real estate. For banks outside the majors this figure is higher, at almost 47%.

Tic:Toc Launches Home Loan For Business Owners

The new CO:Lab home loans, a collaboration between Tic:Toc and the $7 billion La Trobe Financial, can help self-employed Australian’s and business owners excluded by traditional eligibility requirements, as well as customers looking to refinance to invest money into their business.

Tic:Toc launched the World’s first instant home loan™ in July 2017 in partnership with Bendigo and Adelaide Bank, and is now collaborating with another key partner and shareholder, La Trobe Financial, to help bring the home loan process up to speed for a broader range of self-employed and small business applicants.

Announcing the launch of CO: Lab, Tic:Toc founder and CEO, Anthony Baum, said while major lenders continue to tighten lending to small businesses, Tic:Toc has specifically broadened its home loan suite to offer digital home loans to many more Australians, including a broader range of self-employed professionals and small business owners.

“More than 17% of Australians work for themselves, so it’s important home loans keep pace with the shifting workforce to support self-employed customers. “Australia’s self-employed and small business owners have traditionally endured a notoriously difficult home loan process, with an often impractical burden to provide large amounts of documentation.

“Our partnership with La Trobe Financial, one of Australia’s longest operating and leading non-bank credit specialists, has created a broader set of loan options via Tic:Toc’s streamlined home loan assessment and approval technology. This means business owners and self-employed customers now have more loan options, with less hassle and at a lower cost.

“For example, a business owner can use the equity in their home to invest in their business at home loan prices. This could save them up to around 6% per year on standard business loans from the major banks, and they can apply and be approved the same-day via our award-winning online platform.

La Trobe Financial President and CEO, Greg O’Neill said, “As a key shareholder in Tic:Toc, we’re excited to partner with Tic:Toc in developing and launching digital CO:Lab home loans and bring this unique digital approach to market for Australia’s business owners needing finance at such a very important time in the credit cycle. “As one of Australia’s longest operating and leading non-bank credit specialists, we want to support innovation in our industry. We are very proud to back Tic:Toc as they embrace smarter and more customer centric ways to assess and secure home loan and other finance for a broader range of clients moving forward.

Warnings to SMEs seeking finance

An insolvency firm is warning brokers that small business owners looking for finance are becoming more and more likely to break the law, via Australian Broker.

The group, Jirsch Sutherland, said with the property downturn and possible negative gearing changes, directors need to be protected by Safe Harbour regulations.

Alongside uncertainty in the residential property market, company partner Ginette Muller said a credit squeeze or crunch was coming.

She said, “The current property climate is weighing heavily on anyone who either owns, or aspires to own, real estate.

“And this is particularly acute with small business, where access to finance is usually conditional on the bank securing the loan against the director’s house.”

The group said that owners faced with a credit squeeze often turn to solutions like repayment arrangements with the ATO, use other creditors by stretching out terms, selling surplus business assets, reducing overheads and streamlining staff.

Muller said this could lead many to trade while insolvent. She added, “Australia has some of the most draconian insolvent trading laws in the world and the reality is, if you are a director and you take any of these actions, you may be about to commit an offence.”

Safe Harbour was introduced in 2017 and is progressively being used as an insurance policy by directors in a bid to minimize the risk of breaching directors’ duties.

Directors are advised to seek Safe Harbour protection prior to negotiating repayment terms.

“Safe Harbour protection is confidential and is not expensive as the director and senior staff remain in control,” Muller said.

“There are rules they need to comply with to ensure they have a plan and are not driving themselves and creditors off a cliff. In exchange for their diligence, they can avoid the potential threat of insolvent trading. Safe Harbour is just another word for insurance.”

Government launches $2bn fund for SME lenders

As expected we are seeing the Government do “unnatural acts” to support the banking sector, in an attempt to alleviate the home price falls and lending freeze ahead of the election next year. The proposed $2 billion funding pool is small beer in the estimated $300 billion SME lending sector.

There is precedent a decade ago when the government’s $15 billion co-investment with the private sector into the residential mortgage-backed securities market during the GFC.

The federal government has announced a new, $2 billion Australian Business Securitisation Fund to help provide additional funding to small business lenders, via The Adviser.

In a joint statement, Treasurer Josh Frydenberg and the Minister for Small and Family Business, Skills and Vocational Education, Michaelia Cash, have announced that the Australian Business Securitisation Fund (ABSF) will “significantly enhance” the ability for small businesses to access funds by providing “significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms”.

The Australian Business Securitisation Fund will be administered by the Australian Office of Financial Management (AOFM), which was previously involved in the Residential Mortgage Backed Securities Market in 2008.

Speaking on Wednesday (14 November), the two ministers said: “Small businesses find it difficult to obtain finance other than on a secured basis – typically, against real estate. Small businesses that have already obtained finance secured against real estate, but wish to continue to grow, also find it difficult to access additional funding.

“Even when small businesses can access finance, funding costs are higher than they need to be.

“To overcome this and ensure that small businesses are able to fulfill their potential and continue to underpin economic growth and employment, the Australian Business Securitisation Fund will invest up to $2 billion in the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms.”

The government has also reiterated that it will “encourage the establishment of an Australian Business Growth Fund to provide longer term equity funding”.

It is now in consultation with the prudential regulator (APRA) and several financial institutions in regard to the establishment of the fund, which could likely emulate overseas counterparts, such as the UK’s Business Growth Fund. This fund has reportedly invested around $2.7 billion in a range of sectors across the economy.

The ministers said: “Many small businesses find it difficult to attract passive equity investment which enables them to grow without taking on additional debt or giving up control of their business.

“A similar fund has not emerged in Australia, in part, as a result of the unfavourable treatment of equity for regulatory capital purposes.”

APRA has reportedly suggested that it is “willing to review these arrangements” to assist in facilitating the establishment of the Australian Business Growth Fund.

The government has said that it will host a series of meetings with stakeholders during the next sitting period in Canbera to “fast track” the establishment of the growth fund.

“With more than three million small businesses employing around seven million Australians, enhancing small business access to funding is part of the Coalition Government’s plan for a stronger economy,” the ministers said in a joint release.

Several players in the finance sector have welcomed the announcement, with NAB’s chief customer officer, business and private banking, Anthony Healy, saying that “the country’s largest business bank recognised that for Australia to continue to grow, SME businesses need better and easier access to capital”.

Mr Healy highlighted that NAB had been providing unsecured lending to small businesses through its QuickBiz channel, “helping SMEs borrow against the strength and cash flow of their business rather than physical bricks and mortar”.

He continued: “The Australian Business Growth Fund can help this further by providing a way in which SMEs can receive long term equity capital investments to grow their business, invest in new technology and create more jobs, which is why NAB is supportive of the concept.

“We do believe there is more that can be done to provide SMEs with access to equity capital, and we take confidence from the UK Business Growth Fund having operated successfully for several years.

“We look forward to further discussions with the federal government and other participants about the fund’s potential establishment soon,” said Mr Healy.

Likewise, Spotcap’s managing director, Lachlan Heussler, said: “Mr Frydenberg’s proposal meets a real financial need and is a win-win for both Australian small business owners and for the alternative lending industry in Australia.

“Without sustainable lending and affordable finance options, small and medium-sized businesses will struggle to grow, innovate and create more jobs for our economy.”

Mr Heussler continued: “Australia’s 2.2 million small and medium-sized businesses are the beating heart of our economy but are starved of working capital and under-served by traditional lenders who require security.

“By lowering borrowing costs, the proposed fund is a good step in increasing competition between the dominant, big lenders and online, unsecured lenders, such as Spotcap”.

The Council of Small Business Organisations Australia (COSBOA) likewise welcomed the news, with CEO Peter Strong stating: “We congratulate the hovernment, and the Treasurer Josh Frydenberg, on this decision. It’s a well needed game changer for financing of small businesses.”

Mr Strong said that securing access to affordable capital had become the “number one” challenge for small business owners in Australia, particularly as some banks had “relied solely on past earnings rather than taking future earnings potential into account”.

“As a result, if the business owner doesn’t have a house (or other major asset) to put on the line as security then they are stuck – and Australia misses out on the employment that can be generated by the future growth of these businesses,” he said.

Mr Strong continued: “Small business owners often tell me that the only time they can get a loan is when they no longer need it. Others have told me that they have had to travel overseas to get finance and, using the same business plan as they used in Australia, they get their loan. This was a crazy and damaging situation.”

Mr Strong continued: “It is by no means ‘free money’ but small businesses that are sound and have good growth potential will finally have access to affordable finance.”

Touching on the new growth fund, the COSBOA CEO stated: “Importantly, the Treasurer understands that the announcement would fail if the process of managing the funds is convoluted and complex.

“We, with others, have already been asked to join in designing the system to make sure it is fit for purpose and not made unfit by interference from those who don’t understand our sector. We look forward to working with the Morrison Government, the Treasurer, the Small Business and Family Enterprise Ombudsman and other stakeholders to make these two funds accessible for small business owners and start-ups.”