Excellent piece on an important subject – cashflow is the problem! We sure need more than lipservice….
Tens of thousands of small businesses are facing imminent collapse as revenues tank and they run out of cash. Urgent action is required to avert the disastrous consequences which will follow.
Sensible government intervention like travel bans should flatten the coronavirus curve but we need to also need to flatten the curve of small business insolvencies. Unless they get through the next few weeks, a massive number will not be around when the inevitable recovery takes place.
Banks have a crucial role to play but there is only so much they can do. We should not expect banks to simply offer an open cheque book because that would not be responsible lending. No lender can or should lend to a small business which has no or drastically reduced revenue. So what are the banks saying and more to the point what can they actually DO in this situation?
This is what ANZ’s Shayne Elliot has to say…..
And from NAB’s Ross
McEwan…..
There is a general acceptance that post Royal
Commission the banks are trying harder to be good corporate citizens and they
have all since signed up to the Code of Banking Practice that includes a
section on “When things go wrong” but all the codes and commitments in the
world are of little comfort to small business owners right now when time
is of the essence and if they don’t have:
– A manager they can talk to.
– Time to prepare a loan application and wait for an approval.
– Profits which can be offset by tax breaks.
– Term deposits to access.
– The demand to justify new investment (unless they are a toilet paper
manufacturer).
What they need is liquidity
and if there is one lesson from a career in banking it is that “Cash is king”. This
is as true today as it was after the stock market crash of 1987.
In 1987 we saw the collapse of asset values, predominantly equities, today we
are facing a dramatic economic downturn which is causing a cash flow crisis
that is a particular threat to thinly capitalised small businesses. The only
effective solution is to quickly get cash into their hands. And the only party
which can pay for this is the federal government which means the taxpayer. The
challenge is how to do this in a very short period of time.
In hindsight everything is always much clearer but the truth is we have missed
the boat when it comes to establishing a government agency that could perform
this function. This 2015 newsletter reveals how USA’s Small Business Administration has successfully
funded the small business sector for over 60 years.
And this 2017 newsletter talks about the UK’s
success in government funding for small businesses referencing the British
Business Bank. The concept of an equivalent to the British Business Bank
has drawn support from a number of other parties including Kate Carnell, the Australian Small Business & Family
Enterprise Ombudsman.
Whilst for years the US and
the UK have wholeheartedly and very successfully committed taxpayers funds to
support small businesses, we have just begun dipping our toe in the water
with programs like the $2b Australian Business Securitisation Fund and the
Australian Business Growth Fund which is funded by the banks to the extent of
$540m.
We are now paying the price for this lack of foresight and commitment but that
aside, we must find a way to quickly get cash into the hands of small
businesses.
THE SOLUTION?
The government provides a guarantee to enable approved lenders to grant
registered businesses interest free loans up to $50,000 for a period of 12
months. Parameters that would need to be worked out include:
– Definition of an ”approved” lender eg non-banks, challenger banks,
fintechs etc.
– Amount (should it be more or less than $50,000?)
– Term (should it be more or less than 12 months?)
– Amount of government guarantee so the lender has some risk.
– Repayment terms and arrangements at maturity including potential for
rolling over.
– Size and reputation of borrower (employees/turnover, ATO compliant
etc.)
In broad terms, if there are 600,000 small business owners that qualified and
every one took out a $50,000 loan and every single one defaulted, it would cost
the taxpayer $30 billion.
Given that the coronavirus crisis will end up costing the country many times
more than this sum, the question for our Government is “what price do we put on the small
business sector?”
