Tag: SME

Small Business Finance Roundtable

The Reserve Bank hosted a roundtable discussion on small business finance today, along with the Australian Banking Association and the Council of Small Business Australia. The roundtable was chaired by Philip Lowe, Governor of the Reserve Bank.

Small businesses are very important for the economy. They generate significant employment growth, drive innovation and boost competition in markets. Access to external finance is an important issue for many small businesses, particularly when they are looking to expand.

Our own SME survey highlights the problems SME’s face in getting finance in the face of the banks focus on mortgage lending.  The latest edition of our report reveals that more than half of small business owners are not getting the financial assistance they require from lenders in Australia to grow their businesses.

The aim of the roundtable was to provide a forum for the discussion of small business lending in Australia. The participants included entrepreneurs from the Reserve Bank’s Small Business Finance Advisory Panel along with representatives from financial institutions, government and the financial regulators.

The challenges faced by small businesses when borrowing were discussed. The entrepreneurs highlighted a number of issues, including:

  • access to lending for start-ups
  • the heavy reliance on secured lending and the role of housing collateral and personal guarantees in lending
  • the loan application process, including the administrative burden
  • the ability to compare products across lenders and to switch lenders.

The participants discussed a range of ideas for addressing these challenges. Financial institutions shared their perspectives and discussed some of the steps that are being taken to address concerns of small business. The roundtable heard some suggestions about how to improve the accessibility of information for small businesses about their financing options. The roundtable also heard from the Australian Prudential Regulation Authority regarding the proposed revisions to the bank capital framework that relate to small business lending.

The roundtable discussed some other policy initiatives that are currently underway, including the introduction of comprehensive credit reporting and open banking. Participants agreed that these initiatives could help to improve access to finance, and the Reserve Bank will continue to monitor developments closely.

Background

The Small Business Finance Advisory Panel was established by the Reserve Bank in 1993 and meets annually to discuss issues relating to the provision of finance, as well as the broader economic environment for small businesses. The panel provides valuable information to the Reserve Bank on the financial and economic conditions faced by small businesses in Australia.

The Reserve Bank has previously hosted discussions on small business finance issues, including a Small Business Finance Roundtable in 2012 and a Conference on Small Business Conditions and Finance in 2015.

The Australian Banking Association, along with the Australian Council of Small business, representatives for member Banks and other stakeholders were also in attendance to bring their own perspective on the issues and to answer questions. The event was agreed to and organised at the end of last year.

Australian Banking Association CEO Anna Bligh said that the Roundtable was an important opportunity for Australia’s banks to listen first hand to the needs of small business.

“Small business is the engine room of the Australian economy, accounting for more than 40% of all jobs or around 4.7 million people,” Ms Bligh said.

“This Roundtable was an important step in building the relationship between banks, small businesses and their representatives.

“Banks are working hard to better understand the needs of business, their challenges and how they can work with them to help them achieve their goals,” she said.

Online SME lending growing at 79%, could hit $2B by 2020

The online small business lending market in Australia is growing at a faster rate than the US market did at a similar stage of development and could reach over $2 billion in annual originations by 2020, Noah Breslow, OnDeck Global CEO told the AltFi Australasian Summit in Sydney.

“Having grown at a compound annual growth rate of 151% since 2013, we expect to see continued strong growth in the coming years” Noah Breslow said.

Mr. Breslow said that despite over 6,000 banks offering small business lending options in the US, online lending to small businesses has flourished.

“When you compare that to Australia with a more concentrated banking system, there is even more opportunity for online lenders to provide innovative lending solutions to SMEs” he said.

Research shows Australia has overtaken Japan to become the second largest alternative finance player in the Asia Pacific region, second only to China.

“In addition, increased access to data, supportive government initiatives and favourable small business sentiment are all likely to lead to further growth for the industry.

Furthermore, the Government’s ‘Review into Open Banking’ and the introduction of mandatory comprehensive credit reporting (CCR) will likely promote greater competition in the Australian market,” Mr. Breslow said.

Awareness still an issue

Yet despite the Australian market’s growth potential, awareness of alternative finance sources still remains an issue, according to OnDeck’s latest Small Business Owners’ (SBO) Survey, commissioned by research firm YouGov Galaxy.

“Our research shows that despite increasing competition in the Australian alternative finance space, only 30% of small business owners think the number of lending options has increased in the last five years, compared to 70% in the US,” Mr. Breslow said.

The majority of small businesses have been heavily reliant on traditional banks (63%), followed by specialist financiers (29%), credit unions (27%) and family/friends (27%) to source finance.

The research also found signs of unmet demand, with 55% of business owners having been rejected for financing they requested. Difficulties with accessing finance affected the delivery of products and services (37%) and caused layoffs or issues with hiring new employees (32%).

When it comes to future borrowing plans, 33% of Australian SBOs planning to seek additional finance for their business indicated that they would consider an online lender.

“There is a real opportunity for the online SME lending industry to increase awareness of the innovative products and services that are now available, as an alternative to the traditional loans offered by banks.”

OnDeck in Australia

“After pioneering online small business lending more than ten years ago in the US, it is encouraging to see many markets globally adopting similar alternative financing solutions.

For OnDeck, Australia is an exciting market to be operating in and we’re thrilled with the results so far.”

OnDeck entered the Australian market in 2015 via a partnership with MYOB, a leading accountancy software provider, to help close the funding gap between small business financing needs and the availability of capital from traditional sources. The business is also working with brokers and aggregators, including Connective Asset Finance and College Capital.

Globally, OnDeck has delivered more than USD $8 billion in loans to 80,000 small businesses in 700 different industries

Cardtronics to amend unfair ATM contracts

The ACCC says ATM provider Cardtronics has admitted that its subsidiary, DC Payments, offered contract terms with small business that may be unfair under the Australian Consumer Law.

Cardtronics has given a court-enforceable undertaking to the ACCC to change terms that may be unfair for businesses under existing contracts.

“Business contracts need to balance the rights of each party to ensure they aren’t unfair, as smaller firms may not always be in a strong negotiating position,” ACCC Deputy Chair Dr Michael Schaper said.

“We considered Cardtronics’ contract had several unfair terms, including automatic renewal for six years, unilateral increase of fees, and first right of refusal should businesses seek to change providers at the contract’s conclusion.”

Cardtronic has co-operated with the ACCC’s investigation, and undertaken not to enforce unfair terms for all existing merchants, some of whom entered contracts six years ago.

“This undertaking is a great outcome for Cardtronics’ customers, as the unfair contracts protections for small business only became effective in November 2016,” Dr Schaper said.

While Cardtronics contracts will continue to be automatically renewed, the minimum notice to cancel will be reduced from six months to three months and Cardtronics will provide written notice to customers five months before the end of the contract.

Previously, merchants had to keep track of automatic rollover dates more than five years after entering contracts.

Cardtronics must also provide written notice of any fee increase to customers and allow them to terminate the contract without penalty under a new contract term.

The undertaking is available at Cardtronics Australasia Pty Ltd

Background

This outcome is part of a wider ACCC review of small business contracts in a range of industries. As part of this review, the ACCC has been engaging with a range of businesses to encourage compliance with the new unfair contract term provisions.

For more information, see Businesses remove unfair contract terms before new law.

The Australian Consumer Law allows a court to determine that a term of a standard form contract is unfair and therefore void, meaning that the contract is treated as if the term never existed.

If the term is declared void, the remainder of the contract continues to bind the parties to the extent that it can operate without the unfair term.

From 12 November 2016 the unfair contract terms provisions of the Australian Consumer Law were extended to cover standard form contracts involving small businesses.

SME Funding an Issue Says New Report

The latest edition of the Scottish Pacific SME Growth Index has been released. It gives an interesting snapshot on the critically important SME sector in Australia. Once again, as in our own SME surveys, cash-flow is king. 90% of SME owners said they faced cash-flow related issues.  That said, the non-bank sector, including Fintechs need to do more to raise awareness of the solutions they offer.

SME business confidence is on the rise finds small business owners forecasting revenue to improve during the first half of 2018.

There appears to be a splitting of the pack in SME fortunes, with a greater number of previously “unchanged” growth SMEs moving into positive or negative growth.

For most SMEs cash flow has improved compared to 12 months ago, however one in 10 say they are worse off now. The number of SMEs reporting significantly better cash flow (27%) and better cash flow (42%) will hopefully act as a major driver of new capital expenditure and business investment demand.

Despite this reported rise in cash flow, nine out of 10 SMEs say they had cash flow issues in 2017 and nine out of 10 say these issues impacted on revenue. On average, small businesses say that better cash flow would have increased their 2017 revenue by 5-10%.

For SMEs with plans to invest in expansion over the next 6 months, 24% of them report they will fund that growth by borrowing from their main relationship bank – continuing a downward trend, and well short of the high of 38% who nominated this option to fund growth in the first round of the Index in September 2014.

21.7% of SMEs say they plan to use non-bank lenders to fund upcoming growth (with 90.8% planning to use their own funds). Non-bank lending intentions have trended upwards since the first Index, closing the gap between bank and non-bank lending intentions. Despite these intentions, more than 91% of SMEs responded in H1 2018 that in the previous 12 months they had not accessed any non-bank lending options to provide working capital for their business.

So while SMEs seem unsatisfied with traditional banks, they are not yet fully accessing opportunities available to them in the non-banking sector.

Results show that growth SMEs are five times more likely to use alternative lending options than declining growth SMEs, with debtor finance the most popular option. The growth potential for the non-bank lending sector is significant, given that 48% of SMEs who didn’t use non-bank lending in 2017 are considering it for 2018.

With SME owners revealing a solid reliance on personal credit cards to give their business the working capital required for day to day operations, those with better business solutions must find a way to reach these small business people.

Businesses implementing appropriate working capital solutions to get on top of cash flow impediments are well placed to realise their growth ambitions.

ASIC reports on changes to small business loan contracts by big four banks

ASIC has today released a report setting out the details of the changes made by the big four banks to remove unfair terms from their small business loan contracts of up to $1 million.

The report, Unfair contract terms and small business loans (REP 565),  provides more detailed guidance to bank and non-bank lenders about compliance with the unfair contract terms laws as they relate to small business.

The report follows the announcement in August 2017 that the big four banks had committed to improving terms of their small business loans following work with ASIC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). (See 17-287MR).

ASIC Deputy Chair Peter Kell said, ‘The UCT report provides further guidance to help banks and other lenders ensure that their small business loans are fair, and do not breach the rules prohibiting unfair contract terms.’

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 banks to ensure compliance with the law
  • Provides general guidance to lenders with small business borrowers to help them assess whether loan contracts meet the requirements under the unfair contract terms law

‘ASIC will review small business lending contracts across the market. There are no excuses for failure to comply with the UCT laws, and we will consider all regulatory options available to us if we identify lenders whose unfair contracts break the law.’

ASIC will monitor the four banks’ use of the clauses to ensure they are not applied or relied on in an unfair way. ASIC will also examine other lenders’ loan contracts to ensure that their contracts do not contain terms that raise concerns under the unfair contract terms law.

ASIC and ASBFEO will continue work together to ensure small business loan contracts comply with the unfair contract terms law.

Download REP 565

Background

Unfair contract terms protections were extended to small business from 12 November 2016.

ASIC and the ASBFEO have been working with the big four banks to ensure their small business loan contracts meet the standards that are required by the unfair contract terms law (refer: 17-139MR).

Small business loans are defined as loans of up to $1 million that are provided in standard form contracts to small businesses employing fewer than 20 staff are covered by the legal protections.

In August 2017, ASIC and the ASBFEO welcomed the changes to small business loan contracts by the big four banks (refer 17-278MR) that have:

  • Ensured that the contract does not contain ‘entire agreement clauses’ which prevent a small business borrower from relying on statements by bank officers (e.g. about how bank discretions will be exercised)
  • Limited the operation of broad indemnification clauses
  • Addressed concerns about event of default clauses, including ‘material adverse change’ events of default and specific events of non-monetary default (e.g. misrepresentations by the borrower)
  • Limited the circumstances in which financial indicator covenants will be used in small business loans and when breach of a covenant will be considered an event of default
  • Limited their ability to unilaterally vary contracts to specific circumstances with appropriate advance notice.

Fintech Code For Small Business Lenders

Today Kate Carnell, the Australian Small Business & Family Enterprise Ombudsman (ASBFEO), Danielle Szetho, CEO of the industry association Fintech Australia (FA) and theBankDoctor.org published a detailed report on improving transparency in the fintech business lending sector.

This is an excellent piece of work, and will reinforce the legitimacy of SME lending from Fintechs, which from our analysis is growing fast, as the major banks continue to fail in their support of the SME sector in Australia.

The key resolutions are:

  • FA and its industry working group will consult with stakeholders to develop a Code of Conduct by June 2018 to cover unsecured business loans by fintech balance sheet lenders.
  • FA and its industry working group will work with the ASBFEO to ensure they comply with 
the Unfair Contract Terms legislation.
  • by June 2018 FA and the industry working group would agree on a common set of plain 
English key terms and conditions to be highlighted in a summary page in all loan 
agreements.
  • ASBFEO will facilitate a discussion between fintechs and the Australian Financial 
Complaints Authority to explore alternative external dispute resolution services in 
early 2018.
  • ASBFEO will work with the FA to ensure they comply with the Unfair Contract Terms legislation.
  • theBankDoctor.org will write an education piece, in conjunction with ASBFEO, specifically for SMEs to help them understand the “ins and outs” of borrowing from a fintech.

I asked TheBankDoctor Neil Slonim what was the most significant outcome from the report:

“The biggest challenge now is for the the fintech lenders to actually work together to meet the commitments agreed upon. It will not be an easy task given the large number of participants (around 30) and the fact that their business models can be quite different. Compounding this is the fact that not all lenders are members of the industry association Fintech Australia so there is only so much FA can do. The final sentence in Kate Carnell’s foreword is telling … I will keenly monitor progress against the resolutions in this report”

Neil also provided some background on the initiative:

This collaborative and ground breaking project has been twelve months in the making and represents a line in the sand on industry self regulation which is needed to ensure this rapidly emerging sector fulfils its potential of becoming a significant source of funding for Australian SMEs.

I started researching fintech business lending some three years ago when I recognized these lenders could help the large number of businesses unable to access bank funding. These SMEs typically want to borrow less that $250,000 and lack property which could be offered as security.

Through the use of technology, fintech business lenders can make a real difference to small businesses but access to funding is one thing, understanding all the terms and conditions is another. It is almost impossible to make apples with apples comparisons between the wide range of offerings, especially in relation to the total cost of borrowing where annualised rates of interest can range from 14% pa to 80% pa. I figured that if someone like me with 30 years experience in business finance struggled with this, what hope do time poor and often financially unsophisticated SME have?  So I decided to conduct a survey of fintech business lenders to help SMEs answer three simple questions:

1. Is this the right product for my needs?
2. Do I know exactly what it is going to cost?
3. Do I know that I can’t get a better deal elsewhere?

But as an unauthorized, unelected and unpaid SME advocate, my capacity to get lenders to participate in the survey was limited and then any findings would be unenforceable anyway. That’s when I reached out to Kate Carnell and Danielle Szetho who willingly agreed to conduct this joint project.

Fintech Australia brings its authority and membership base although not all fintech lenders are members of FA and lenders, whether members of Fintech Australia or not, operate different business models and have diverse views. One of the most telling responses in the survey was that lenders were evenly divided on the question of the adequacy of the current level of industry transparency and disclosure. This provides an insight into the challenges of self regulation.

I applaud the lenders who have embraced this opportunity to drive self regulation. With initiatives like the Glossary of Terms, which is published as an appendix to the report, fintech lenders are now setting standards for other non-bank lenders to follow.

Kate Carnell and her team have been constructive and collaborative in helping fintech lenders reach agreement on areas in which more can be done to improve transparency and disclosure.  As the banks have learned, Ms Carnell is a no nonsense champion of the small business sector and she can be relied upon to follow up on her commitment to “keenly monitor progress against the resolutions in this report” .

I am pleased our work has brought the issue of transparency and disclosure in fintech business lending clearly into the public arena and look forward to continuing to work with all parties to enable these lenders to become significant, transparent and trusted alternative sources of debt finance for Australian SMEs.

ANZ refunds $10 million for failing to disclose credit card charges

ASIC says the ANZ bank will refund $10.2 million to 52,135 business credit card accounts, after it failed to properly disclose fees and interest charges for the product.

ANZ reported to ASIC that for some of their ‘Business One’ business credit card customers they either failed to disclose, or incorrectly disclosed (in some cases from as early as 2009):

  • Applicable interest rates
  • The interest-free period
  • The annual fee
  • When an overseas transaction fee might apply
  • The amount payable for overseas transactions with foreign merchants or financial institutions.

ANZ has contacted eligible customers to advise they will receive a refund with interest.  Former customers will receive a bank cheque and current customers with an open account will receive a refund paid into their account.

ANZ has since updated its procedures and fee information for Business One.

Customers with queries or concerns about this matter should contact ANZ on 1800 032 481.

Background

No consumer credit card accounts have been impacted by this matter.

Many of the ‘Business One’ credit card customers were small businesses. In 2017 ASIC launched a small business strategy to assist, engage and protect small businesses.

ASIC acknowledges the cooperative approach taken by ANZ in its handling and reporting of this matter.

Building sub-contractors worry about tough 2018

From Smart Company.

There could be troubled times ahead for small businesses and contractors working in construction, with property analysts and economists kicking of the year with predictions the residential apartment sector slowdown could cause pain.

“There is absolutely no question we have seen a considerable softening in the construction end of the residential apartment space,” Watpac managing director Martin Monro warned in The Australian today.

While data from the Australian Bureau of Statistics shows new housing starts in the year to September rebounded, experts and industry leaders have been divided in commentary on the state of the sector and what the next 12 months will hold for builders and their suppliers.

Digital Finance Analytics principal Martin North says while it’s not a uniform trend across the country, there are troubling signs on the eastern seaboard in particular.

“What I’m noticing is that those in the construction sector – from small builders to sub-contractors – have significantly lower confidence levels than they did six months ago,” he says.

“Their forward pipeline of work is wilting, especially across Brisbane and Melbourne.  And now I’m seeing it in and around Sydney for the first time.”

And it’s demand for high rise apartments, he says, that is seeing the biggest drop.

“Investors are quite concerned because capital values look to have stalled and could be reversing.  It’s also much more difficult to get financing now and foreign buyers have defected,” he says.

North says there could be more pain to come in Queensland.

“Brisbane is where the pain is most extreme, but I’m seeing it in and around Melbourne and Sydney now.”

Sub-contractors concerned over risks of non-payment

Weakness in the Brisbane market has already claimed its casualties, with several builders having liquidated in the last year.

Among the 2017 collapses was Queensland One Homes back in August and CMF Projects in June. 

With several other builders having suffered a similar fate, there are fears any continued slowdown could see more sub-contractors not getting paid. Those working as contractors in the building space are worried more pain could be to come this year.

“The industry is a shambles and is overseen by an inept QBCC who are hamstrung by poor legislation,” says Subbie United’s John Goddard.

Goddard claims sub-contractors have a difficult time recovering what they owe in the event a building company collapses.

“You then have pre-insolvency advisors telling these builders how to hide assets before they recommend a friendly liquidator to defeat creditors who are in the main, subbies.”

Housing a cyclical industry

However, small business ombudsman Kate Carnell says while weakness exists in some parts of the building sector, small businesses and contractors should not be alarmed.

“The thing about the industry is it’s cyclical.  There’s big ups and downs and that’s how it works. And in some places there’s an oversupply in that space,” she says.

“But if you look at some of the figures around new home starts, there’re looking pretty good and strong.  There’s still a dearth of new homes in the markets as we’ve got quite strong population growth.”

ABA Says Small Business Saves Billions With Lowest Rates in Decades … But

The ABA says there is some great news for Australian small businesses who are now paying $9 billion less in interest on current loans than compared to the same time in 2011, with the average interest paid the lowest in 20 years.

According to RBA data, the past six years have seen significant falls in interest rates for small business, with average rates paid on their loans now at the lowest levels since RBA data commenced in 1993.

We assume this is the chart the ABA is referring to – larger business are getting better rates by far!

But it is not that simple, as this chart also from the RBA shows. Advertised rates from both term residential security and overdraft are rising (despite no change to the cash rate).  So the ABA is choosing the chart to fit their narrative.

Australian Bankers’ Association Chief Economist Tony Pearson said small businesses are a significant driver of the Australian economy, so anything that assists them is good news.

“Less interest paid by small business on their loans will help drive economic growth, create new jobs and tackle unemployment,” Mr Pearson said.

“The average interest rate paid on all current loans held by small businesses has fallen in the past six years from 8.40 per cent in 2011 to 5.30 per cent now. Based on a loan of $100,000 that equates to an interest saving of around $3,000 per year.

“When you look at the bigger picture the story is even more positive. As of September, there were a total of $282 billion in outstanding loans to small businesses in Australia, and based on the lower rates, they’re now paying almost $9 billion less a year in interest compared with the same time in 2011.

“With two million small businesses in Australia, employing nearly five million people, we need to ensure this sector continues to flourish,” Mr Pearson said.

Kevin Taylor runs ProActive Chartered Accountants and says for himself, and his 200 plus small business clients, low interest rates are good for the bottom line.

“Every dollar saved means extra profits or a chance to help the business grow by reinvesting in new equipment or hiring more staff,” Mr Taylor said.

“Additional cash flow, through low interest rates, means you can pay down the loan sooner, or put it away for a rainy day. Whatever you choose to do it’s a positive for the business and the economy.

“While business interest rates are at record lows, electricity prices are at the other end of the scale. Higher electricity prices are a double negative for businesses, as they have to pay the bills and their clients have less money to spend on other things,” Mr Taylor said.

For larger businesses, the average interest rate has fallen from 7.10 per cent to 3.40 per cent over the past six years. As of September, there were a total of $747 billion in outstanding loans to large businesses. The amount of interest being saved annually, when compared with six years ago, is a staggering $27.6 billion.

“That’s a lot of extra money that can be invested into growing a business and creating jobs,” Mr Pearson said.

Our Top Reports Released In 2017

As we tie the ribbons on 2017, here are our most popular reports from 2017, all of which are still available free on request.

The Property Imperative Volume 9 Report Released Today

Time For “Digital First” – The Quiet Revolution Report Vol 3 Released

DFA’s SME Report 2017 Released