SME – Page 9 – Digital Finance Analytics (DFA) Blog

SME Business Confidence – A Curate’s Egg

As we continue our journey across the latest SME survey data, today we look at the latest business confidence scores. We ask a series of questions about hiring plans, sales expectations, profit margin, borrowing plans and other factors, and distill this into a relative numeric score. Essentially, the higher the score, the more confident the business. This is important because confidence is directly linked with business investment and jobs creation.

We find that generally businesses who are formed as a company are more confident compared with those who are not; and those willing to borrow are more confident than those who do not.

We also found that businesses with smaller turnover were significantly less confident, compared with those with larger volumes. This is a problem because there are many more business with smaller than larger turnover (note the yellow line – distribution of businesses – is a log scale).

Score by industry varies, with education and training the most positive and mining the least positive.

On a state basis, VIC and NSW businesses are the most confident, whilst those in NT and WA are the least positive.

We also find considerable regional variations, with those closer to a CBD more positive, whilst those in regional and remote areas are less positive.

Finally, we look across our SME segments, we find that career switching start-ups are the least confident, whilst large established firms are most confident.

So, if you are a small business based in regional WA, you are most likely to be feeling less confident about the future of your business, compared with a large established business in VIC or NSW CBD. A Curate’s egg indeed!

Next time we look at SME’s banking relationships.

SME’s Are More Connected Than Ever

We continue our series on the results from our latest SME surveys. Today we look at the digital trends of SME’s. On average, around 13% of firms are digital luddites – meaning they hardly use digital at all, but the rest are digitally aligned. This means they prefer using a mobile device, are likely to be using social media, and to use cloud based services.

We separate these digitally aligned firms into those who are natives – meaning they have grown up digital, and those who have migrated to digital. Natives have a much higher propensity to adopt new technology, and are much more interested in Fintech offerings.

Things get interesting when we look at the segments.

This is reflected in their preferred channel for banking. More than ever are now wanting their banking delivered via apps, or smart phone. Bank branches are important, for a minority, mainly because of the need to handle cash. The channel mix does vary by segment.

Many firms are now connected 24×7, but this does vary by segment. Around 20% are hardly online at all. This highlights the need to bankers to have an appropriate set of channel strategies for their SME customers. Many do not.

More are using smart devices as their main device. Some still use personal computers.

Awareness of cloud delivered services is increasing, and once again we see some interesting variations across the segments. Digital natives are most comfortable.

Finally, awareness of Fintech alternatives to the banks continues to grow. Again, digital natives are most comfortable and most likely to consider applying for funds from non-conventional lenders.

Next time we will look at business confidence, which varies across the segments, and across states.

SME’s Are In A Cash Flow Squeeze

In the second of our latest posts using data from our SME surveys, we look at how and why firms borrow.

Some firms will simply not use credit at all, and we find that on a segmented basis, there are significant variations. For example, almost all Cash-Strapped Sole Traders will be seeking credit, whilst only 30% of Career Switching Start-Ups will borrow. Most banks do not segment their business effectively, so do not understand these important differences. There are also very different credit risk and default profiles.

For those who will borrow, there are many reasons why they need funds. However, the number one need is for working capital.

Within working capital the main reason is delayed payments (43%).

This is because the average number of debtor days continues to blow out. More than 50% of payments are now being settled beyond 50 days. Large firms and government departments are the worse payers.

Firms in WA and TAS have the longest wait times for payment.

There are also some variations between industries.

Finally, we see that the average loan and card balance varies wildly across the segments. Note this chart shows the value on a log scale.

We do not think the underwriting standards in many of the banks take sufficient account of the variations between firms. As a result, many are not able to gain the funds they need, whilst others are regarded as more risky than they really are. Time for better segmentation.

Next time we look at how firms are using technology, and how they view Fintech alternatives.

SME’s At Risk From An “ATO” scam – fake emails again

From ITWire.

Cyber criminals always search for the motherload – phishing emails that get through. This time they have targeted small to medium businesses that that lodge Business Activity Statements (BAS) online.

The Australian Internet Security Initiative (AISI) part of the Australian Communications and Media Authority (ACMA) has issued a warning over what is one of the most sophisticated spear phishing campaigns yet.

The emails come from BASnotification@atogovau.org and state that your next activity statement is now due. The real email address for the ATO is BASnotification@ato.gov.au. It is very well done – all links go back to the ATO website except for “Click here to download your statement.”

That link takes you to a fake ATO website that can download malware designed to steal your online banking and other credentials and can potentially open a ‘back door’ that enables installation of malware, such as ransomware.

The cybercriminals have also managed to add atogovau.org to the global list of “approved” domains and added Sender Policy Framework (SPF) that reduces the likelihood of email servers rejecting it as spam.

Protection

It comes down to common sense – hover your mouse over all links before clicking. You need to know that atogovau.org is a fake.

If the link asks you to install any application, say no.

Use paid anti-malware on all critical systems.

Comment

I added the “paid” word to the AISI advice because the majority of these paid protection programs use machine learning to identify scams. For example – and it is only one provider – Symantec has created the world’s largest Global Intelligence Network (GIN) and according to the company it only takes a handful of instances to be identified before it blocks it for everyone.

Also, it has developed phishing website detection that analyses the known websites (ATO.gov.au) and can tell if another is a phishing site (atogovau.org).

It never ceases to surprise me that SMB skimps on security, many still using free or consumer-grade, anti-virus solutions when enterprise-grade will protect from these scams.

Businesses remove unfair contract terms before new law

The Australian Competition and Consumer Commission’s new report into potentially unfair contract terms details its review of 46 contracts across seven industries, which resulted in a range of businesses making changes to their small business standard form contracts.

The ACCC will begin enforcing the new law this week [Nov 12], when consumer protections against unfair contract terms are extended to include up to 2 million Australian small businesses.

The report, Unfair terms in small business contracts, provides an industry-by-industry breakdown of the common terms of concern identified by the ACCC following its engagement with businesses in seven industries, including advertising, telecommunications, retail leasing, independent contracting, franchising, waste management, and agriculture.

“Businesses should be aware that from Saturday the ACCC is moving from its education phase to an enforcement approach where we will be targeting unfair contract terms,” ACCC Deputy Chair Dr Michael Schaper said.

“Positive engagement with the ACCC over the last year has seen businesses such as Australia Post, News Limited, Optus and Scentre Group (Westfield) amend or remove contract terms that may have been problematic when the new law commences.”

“Small businesses sign an average of eight standard form contracts a year and from November 12 these contracts will be covered by a law preventing unfair terms in contracts that are offered on a ‘take-it or leave-it’ basis.”

The ACCC has identified three types of problematic terms as being widespread and likely to cause concern.

“Terms that give one party an unconstrained right to unilaterally vary key aspects of a contract, that unfairly seek to shift liability from the contract provider to the small business or that provide unnecessarily broad termination rights will almost always raise concerns about unfairness. Businesses that rely on these types of terms should be aware that they are leaving themselves open to action by the ACCC or another party,” Dr Schaper said.

“Businesses should consider whether a contract term creates an imbalance of obligations between the parties, whether it is necessary to protect a legitimate business need, and whether it causes detriment to the other party. Businesses should ensure that potentially problematic terms are only as broad as reasonably necessary to protect their legitimate interests, as terms that grant rights beyond this are likely to be unfair.”

The report provides guidance to these industries about these specific concerns, but also serves as general guidance to businesses operating in other industries about the kinds of terms that may be considered unfair from November 12.

Previous research has shown almost two thirds of small businesses claim to have experienced unfairness in contract terms and conditions they have signed, with almost half report experiencing some harm as a result.

See also: Unfair terms in small business contracts

Background

The law will apply to a standard form contract entered into or renewed on or after 12 November 2016. If a contract is varied on or after 12 November 2016, the law will apply to the varied terms.

Contracts covered include those between businesses where one of the businesses employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.

Standard form contracts provide little or no opportunity for the responding party to negotiate the terms – they are offered on a ‘take it or leave it’ basis.

The law sets out examples of contract terms that may be unfair, including:

terms that enable one party (but not another) to avoid or limit their obligations under the contract

terms that enable one party (but not another) to terminate the contract

terms that penalise one party (but not another) for breaching or terminating the contract

terms that enable one party (but not another) to vary the terms of the contract.

Only a court or tribunal (not the ACCC) can decide that a term is unfair. However, if a court or tribunal finds that a term is ‘unfair’, the term will be void – this means it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Major bank lending changes to benefit SME borrowers

From Mortgage Professional Australia.

The relaxation of the lending policies at Westpac, CBA and St George are expected to jumpstart property purchases by small and medium-sized enterprise (SME) owners.

All three banks lowered the requirement for SME borrowers to present two years’ worth of financial records as income verification, reducing this down to one year’s worth. Moreover, borrowers no longer need to present their tax returns.

Westpac and CBA also increased the lending capacity percentage for SME buyers to 90% (from the previous 80%) of the purchased property’s value.

Such initiatives are important because “in the past, banks have viewed the SME demographic as risky, despite many owners coming from strong corporate or trades backgrounds with a long successful working history in addition to strong equity in various investment classes,” said Joel Wyld of the Mortgage and Finance Association of Australia.

“Many SME owners have had to settle for low doc loans for a two year period which has deterred them from purchasing property.”

Lending changes make property more attractive for SME owners

From Australian Broker.

Lending changes by Australia’s major banks could soon result in a surge of property purchases by small and medium-sized enterprise (SME) owners.

Westpac this week announced they would increase their loan to value ratio (LVR) from 80% to 90% of a property’s value self-employed borrowers after the Commonwealth Bank announced similar changes earlier this year.

The last 12 months have also seen Westpac, CBA and St. George announce they would only require one year of financial records as income verification for self-employed borrowers. Previously they had required two years of financial records and tax returns.

Joel Wyld, director of mortgage broker Peasy, said the lending changes indicate lenders’ perceptions of SME borrowers are evolving.

“In the past banks have viewed the SME demographic as risky despite many owners coming from strong corporate or trades backgrounds with a long successful working history in addition to strong equity in various investment classes,” Wyld said.

“In the past, many SME owners have had to settle for low doc loans for a two year period which has deterred them from purchasing property,” he said.

While some of the lending changes have been in force for some time, Wyld said a large number of SME owners are unaware of the more lenient lending criteria and with more than two million SME owners across Australia it could provide brokers with an excellent opportunity to extend their client base.

“The time is now ripe for SME owners to capitalise on the new lending rules to secure either a dream home or business premises,” he said.

“The number one piece of advice given to SME owners when applying for a property loan is to ensure financials are up-to-date. Inaccuracies in financial records and book keeping will delay the settlement process and could ultimately determine if the loan application is accepted or declined.”

Wyld said there has also been a growing trend towards establishing property trusts and partnerships using property as vehicle for SME owners, though he said while those structures have a place in the market, brokers need to be careful when assessing income of a business if multiple owners are involved and should recommend those involved seek legal advice.

Australian small businesses could be stretched by changes to commercial credit cards

From The Conversation.

Small to medium enterprises (SME) are increasingly relying on commercial credit cards to finance their operations, because payment terms for the businesses they supply are stretching out. But if the Reserve Bank of Australia (RBA) goes ahead with plans to include commercial cards in the new caps on interchange fees, SMEs will be even more hard pressed to make ends meet.

These interchange fees are a major component of the Merchant Service Fees that all Merchants pay on accepting payment cards. Commercial cards are however operated on a different business model to consumer credit cards. For example, commercial cards have much higher credit limits than consumer cards and the flow of interchange revenue from spending on these cards, to the card issuers (usually banks) enables them to take more credit risk and hence extend more credit to SME’s.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has said that, “the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients, a leading factor”. She claimed that “the big end of town are delaying payments to those that can least afford it; small-to-medium sized enterprises”.

One example of this is major food businesses Fonterra and Kellogg’s stretching payment terms for suppliers from 90 days to 120 days. The consequences of this are twofold; firstly the large corporations will hold onto money for longer and get positive returns on that, while the SME’s are forced to use expensive overdrafts at banks to fund their ongoing business.

A survey by a UK company MarketInvoice earlier this year, found Australia was the worst offender for late payments, ranking even below countries such as Mexico. Some jurisdictions have however been moving in the other direction; since March 2013 the maximum payment terms in the European Union have been 30 days, unless an agreement is made in writing by both parties, in which case the maximum is 60 days.

To overcome the cash flow challenges that go on along with longer payment terms, many SME’s use commercial credit cards to pay their suppliers and hence take advantage of the up to 55 interest free days (all the major Australian banks issue commercial cards and the interest free periods are up to 55 days) on these cards. SME’s are using commercial credit cards for more than just their cash flow.

These cards can be used to partly finance payments to suppliers, particularly where an SME has struggled to get finance from a bank. SME’s are hence more likely to rely on commercial cards as a source of finance than are larger businesses, which typically can raise capital through a variety of means like bank loans, share issues or corporate bonds.

The reduction in interchange which the RBA is imposing may cause issuers, including banks, to cut costs by reducing credit risk, which would mean less credit extended to SME’s, via commercial cards. Issuers could also find this segment of the credit card market less attractive and hence be less willing to offer this type of credit card to SME’s.

The RBA’s reasoning for including commercial cards ín the proposed maximum 0.80% interchange cap, is there’s not enough evidence to suggest that issuers will stop providing these cards under the cap. The RBA however accepts that “this may involve the introduction of fees on these cards and/or the reduction of the interest free period”.

According to the Australian Bureau of Statistics, as of June 2015, the SME sector employed 68% of Australians and it generated 55% of total income from industry. As larger businesses look to increase the number of days before they settle their invoices from SME suppliers and these businesses face pressure to pay their employee’s wages and utility bills on time, the value of commercial payment cards is all the more obvious.

Less commercial payment cards; with less credit offered on them, at higher interest rates, could well be another unintended consequence of the RBA’s intervention into the payments system.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology

SMEs need protection from online Payday Lenders

From TheBankDoctor. In 2015, online SME lending in Australia was around $250m, up from a zero base two years ago. Growth will continue exponentially and online SME lending will become a significant alternative source of funding for Australia’s SMEs.

Online lenders perform an important role by lending to thousands of SMEs that would otherwise struggle to attract support from a bank. I am a big supporter of this sector but am concerned that many SMEs don’t understand what they are getting themselves into when they borrow from some lenders that could be more accurately described as SME payday lenders to SMEs.

These concerns together with suggestions as to how the interest of SMEs could be better safeguarded were summarised in this recent article in Fairfax Media. The full version follows:

Its not until they have repaid the loan that cash strapped, time poor and financially inexperienced borrowers finally work out how much they have actually paid in fees and charges to some online lenders. You need to have a very good business to make a profit while paying up to and even beyond 100 per cent but this is what many unsuspecting SME borrowers find themselves up for.

As an example, a NSW based wholesaler took a $20,000 loan for a period of 8 months and agreed to pay it back at $161 per day for 171 days. The total amount repaid including fees was $27,531 representing an annual rate of 115 per cent.

Perversely, the lenders charging the highest rates are able to grow their businesses the fastest. By charging higher rates, these lenders can afford to:
• Spend more on advertising which drives more leads and therefore sales.
• Pay higher brokerage and commissions (up to and even beyond 4 per cent) to introducers who then become attached because it’s easier and more profitable to refer everything to one big lender.
• Offer wholesale investors and lenders better returns thereby attracting more funds to feed the ever expanding machine.
• Take on riskier loans because there is a bigger buffer to absorb losses.
Lenders that have achieved rapid growth are seen as more credible which attracts partners, investors, introducers, media as well as borrowers. Meanwhile the lenders that charge more reasonable rates face the prospect of being left behind. These players tend to be smaller, newer and have lower profiles. They are professionally and financially committed and are passionate about the role the industry can play in helping small business owners achieve their goals.

The SME online lending market is already crowded with more than 25 operators all with similar websites offering quick and easy solutions to the financing needs of small business owners. But with some of the lenders it’s not easy for a borrower to readily answer three simple yet critical questions:
• Is this the best product for my needs?
• How much is it really going to cost me?
• Could I get a better deal elsewhere?
For instance, if it’s going to take time for the benefits of a new investment to kick in, a loan that requires you to commence principal repayments on day one may only exacerbate your cash position.

And the way many loan agreements are structured and worded makes it difficult to work out the total cost of borrowing which in turn means it’s nigh on impossible to tell if another lender would offer a better deal. In such circumstances the natural tendency is to go with the recognised name or the one that your broker or advisor recommends and these are often one and the same.

The lenders we are talking about here are online balance sheet lenders that fund loans off their own balance sheet using a combination of debt and equity just like any other business. This is not an issue with Peer to Peer platforms because here the rates paid by borrowers are largely determined by what third party investors are prepared to offer so P2P rates are much more transparent. Borrowers on P2P platforms just need to be sure they understand what fees they pay (up front and on-going) to the platform.

It seems some online lenders exhibit the same skewed priorities they criticize banks for – purporting to look after the little people but in reality looking after themselves at the expense of the little people. Yet poor bank behaviour is much more likely to be exposed because banks are highly regulated public companies whose actions are closely scrutinized by regulators, ratings agencies, analysts, the media, politicians and possibly also in the not too distant future by a Royal Commission. Plus there is a degree of self-regulation for example the Australian Bankers Association‘s Better Banking Program that is being lead by reputable and independent third parties. The same cannot be said for the online lending sector where unlisted, unscrutinised and largely unregulated relatively new businesses are all seeking to stake their claim in the huge SME borrowing space.

This is a nascent market and in time borrowers and introducers will become better informed about the merits of alternative offerings. So what could and should be done to safeguard the interests of SMEs? Should they be afforded similar protection as consumers or should we just refer to “caveat emptor” and allow market forces to shape the sector over time?

It’s a balancing act but both regulators and industry participants should do more to safeguard the interests of borrowers and build the reputation of online lending as a reliable and trustworthy alternative source of finance. For instance it would be easier for borrowers to gain confidence regarding the total cost of borrowing if:
• All the fees and charges imposed were presented on an Annualised Percentage Rate (APR) basis. APRs are not without limitations but they do enable borrowers to make apples with apples comparisons.
• Lenders were required to use consistent terminology and plain language in all agreements.
In addition borrowers should be informed of any payments made to brokers and introducers and any other relationship or arrangement with parties such as shareholders, investors, lenders, partners etc. that could compromise the ability of the lender to act in the best interests of the SME borrower.

The way we are heading it is only a matter of time before a scandal takes place and this will trigger the intervention of bodies including ASIC and the ACCC.

Meanwhile, lenders themselves need to take responsibility for the future of their industry. Progress has been slow to date notwithstanding the endeavours of some, one of whom described the process of getting the players to come together as “like herding cats”.

Individually and collectively online lenders have an opportunity, indeed a responsibility, to improve the financial literacy of small business owners. Transparency is a word that is bandied around a lot in online lending but lenders that only quote daily repayments, advertise rates that are only available to the very best quality borrowers or hand-cuff borrowers in with `lock-in fees are the antithesis of transparent and responsible. Online lenders should also publish details of their loan book such as rates, size, credit quality, term, amount, defaults, enquiry and acceptance rates etc. Some are already doing this to varying degrees but it needs to become the norm not the exception.

External research companies like DFA Analytics, DBM, East & Partners and RFi have started covering the sector. Comparison sites like Finder and Mozo offer basic information but usually couched in terms of “rates starting from…” which really isn’t that much help. Review sites like Trust Pilot offer a platform for borrowers to share their experiences. Interestingly, currently there are more online lenders who don’t use Trust Pilot than who do use it and amongst the non-users are some of the players who charge the highest rates.

It is telling that Google whose corporate motto is “Don’t be evil” is becoming a quasi industry regulator. It is doing its bit to safeguard Australian consumers by banning advertisements from personal payday lenders for loans in excess of 60 days. In the USA Google has banned advertisements for personal loans with APRs higher than 35 per cent. Google might already be considering the steps it could take to safeguard the interests of SMEs in the USA and around the globe.

The lack of transparency and regulation in the online SME lending market has allowed some high priced lenders to achieve impressive growth rates but at what cost to small business borrowers? In addition, their conduct exposes the entire sector to reputational harm. For online lending to become a trusted, permanent and significant alternative form of SME finance borrowers need to be able to readily tell if the loan they are considering best suits their needs, what its true total cost is and whether they could get a materially better deal elsewhere.

Note: These concerns also apply to the traditional offline non-bank SME finance sector. Many of these lenders have been around for years and charge rates that can be at least as onerous as the most expensive of the online lenders. I recently saw an agreement that bound a small business owner to an APR of 140% on a nine month loan.

Reproduced with permission.

Xero Team With PayPal To Ease SME Cashflow

From the Xero Blog.

Xero is making huge strides towards a great online revolution in small business: to build a financial web that connects small businesses, banks, accountants and bookkeepers, and online software, that really allows businesses to grow by zeroing in on what they do best — building their own business.

But it’s hard for businesses to do that when they’re spending their time doing important yet time-sucking tasks like chasing payments, instead of innovating and growing. For example, we’ve found that Xero customers have sent almost 9.5 million invoices over the last 30 days alone. That’s a sure sign of healthy small businesses. Yet based on our current data, over 60% of those invoices will be paid late.

Xero + PayPal

With unpaid invoices causing a major headache for small business owners, we are pleased to announce at Xerocon San Francisco a slick new integration with PayPal, which is due to be released later this month.

This update will deliver a seamless new checkout experience for customers that will make it easy for invoices to get paid as soon as they are received, using Xero’s online invoices and PayPal Express Checkout. In addition to a fast payment experience, Xero users will now be able to see real-time status updates on outstanding invoices. Payment reconciliation will also be a breeze, with Xero doing all the heavy-lifting for you by auto-matching payments and fees.

I’m excited to have PayPal join us on our journey to rewire the small business economy. As small businesses move to simple, easy-to-use online tools like this latest integration in our ecosystem/App Marketplace, financial institutions and large enterprises are being made aware of the fundamental architectural shift. They’re connecting to these new platforms and as a result, the financial web is evolving quickly, especially where shared transactional services have become the expectation, shifting the focus on to revenue, opportunity, compliance, and risk management.

PayPal are a major online player. They’re providing an open and secure payments ecosystem across more than 188 million active accounts using 100+ currencies in over 200 countries.

Paypal Express Checkout offers a quicker, easier payment experience meaning customers can complete a payment in just 3 clicks once they receive an online invoice, removing the barriers of completing payment.