The major banks’ lending record for small business has come under fire, with Dun & Bradstreet claiming that hundreds of thousands of business are missing out on finance from the major financiers due to an inability to properly “score” small business risk.
Asset finance expert Daryl Raggatt agrees there’s room for improvement.
He says banks are “generally doing a pretty poor job” when it comes to SMEs, with provider numbers falling since the global financial crisis, and more hoops to jump through to get funding across the line.
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Raggatt, founder and managing director of asset finance broking firm Enterprise Finance, says the “banks are generally not very helpful or receptive to SMEs, certainly nothing to the degree that existed prior to the global financial crisis.”
“We find we have to put in so much more effort today in order to get a deal over the line than we did in the past.”
Drawing on his 34 years in the industry, Raggatt notes that funding sources have dried up since the 1990s – from 36 sources of finance in 1990 to eight today. Four Australian-based sources of funding withdrew when the GFC hit, he says.
Raggatt says there are particular problems for SMEs seeking funding for fit-outs and even the major fashion retailers are not immune to risk-averse lenders.
“Take the franchising side of things, groups like Subway or Donut King, it’s so much more difficult to get things done there.
“And when you go in to the retail space, if you’ve been in business for 10 years and want $200,000 to fund a new space, you’re still in trouble.”
Raggatt attributes the shift to a “knee-jerk reaction” by lenders to the GFC and a shunning of subjective elements, such as the quality of management.
“If they were fair and analysed the areas where they lost money [during the GFC], they would have to agree they should never have lent the money in the first place.
“So what has happened is the classic case of throwing the baby out with the bathwater.
“In the past, they [lenders] were prepared to back their judgement, but there’s now a pessimistic attitude towards every transaction that comes their way.”
The good news is there’s been some improvement, albeit a marginal one. The bad news is conditions for SMEs might not pick up until 2014.
“Do I expect in the foreseeable future that we’ll return to commercial sanity? I’d say no,” Raggatt says.
“I can’t see them getting back to normality, if that’s the right word, certainly for at least two years.”
D&B says its study of the credit profile of Australia’s one million-plus unincorporated entities shows that more than 650,000 have no major financial obligation and nearly 400,000 would immediately qualify for finance, given their minimal-to-low risk profile.
It says it has developed a small business score – comprising information on the business owner and from its own database – to predict the likelihood of a business going under within 12 months, which looks at metrics including business-to-business trade payment date, consumer default dates and credit enquiry volumes.
Not surprisingly, the score finds that businesses deemed most likely to collapse took longer to pay bills and have owners who have defaulted on a credit obligation.
The new system has been welcomed by the Council of Small Business of Australia, with executive director Peter Strong saying further information on the country’s SMEs will give lenders more confidence when assessing applications.
In response to D&B’s criticisms of small business lending, National Australia Bank says it remains “ committed to supporting small businesses and have consistently supported the sector at a time when the industry went backwards.”
“Bank lending guidelines are influenced by many factors. Good quality, well-managed and tightly run businesses with a clear strategy and sustainable business model will always enjoy the support of their bank,” says Daryl Johnson, executive general manager of nabbusiness.
“As a general rule when assessing applications we often refer to the ‘five C’s’ – character, capability, cashflow, capital and collateral.”