“Game-changing” government plan pledges $2 billion for capital-starved SMEs

Treasurer Josh Frydenberg

Treasurer Josh Frydenberg. Source: AAP Image/Wayne Taylor.

Small business owners and advocates have welcomed a $2 billion commitment from the Morrison government to set up a commonwealth fund to help SMEs access finance.

Announced on Wednesday, the policy is the latest move by the government to double down on small business ahead of the election next year, following a decision to bring forward SME tax cuts last month.

Treasurer Josh Frydenberg will oversee the creation of a business securitisation fund that will provide funding to smaller banks and non-bank lenders to promote more competitive conditions in the SME lending space.

“Small businesses find it difficult to obtain finance other than on a secured basis typically, against real estate,” Frydenberg said in a statement on Wednesday.

“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.”

The government has also backed a business commercial growth fund initiative being pushed by small business and family enterprise ombudsman (ASBFEO) Kate Carnell that will provide longer-term lending opportunities to high-potential SMEs.

Carnell says the securitisation fund is a positive step but must be viewed together with her proposal for a commercial business growth fund as a holistic solution for capital-starved SMEs.

“Fundamentally what [the securitisation fund] will do is create more competition in the market so that tier two banks and non-bank lenders will have access to affordable capital to be able to lend,” Carnell tells SmartCompany.

“One produces more competition and the other one focuses on the longer term, and probably larger lending to high-growth-potential SMEs.”

The government has been working on a policy to assist smaller firms with access to finance for several months, with Minister for Small and Family Business Michaelia Cash last month revealing “cabinet-level discussions” were taking place.

The policy is likely to be one of several more small business-focused policies the government will unveil in the lead up to the 2019 election, with tax office dispute resolution and an extension of the instant asset write-off also on the cards.

How will it work?

The $2 billion securitisation fund will focus on supporting the capability of smaller banks and non-bank lenders to support SMEs.

It will be underpinned by commonwealth bonds, which means the government will shoulder a portion of the risk in federal accounts.

The Australian Office of Financial Management will administer the fund, while it is expected lenders will apply normal standards to loan applications.

Access to finance has been an ongoing issue for small businesses, while issues have intensified in the wake of the banking royal commission, which has prompted the big banks to tighten their belts.

Aodhan MacCathmhaoil, founder of waste recycling business Waster, spoke to SmartCompany back in September about the difficulty he had securing a bank loan.

He ended up giving up trying to access capital from a bank after being asked to provide a personal guarantee just to establish a direct debit facility.

Speaking to SmartCompany today, MacCathmhaoil welcomed the $2 billion fund, but said the devil will be in the detail.

“It sounds great, especially at the moment where credit is difficult,” he says.

“Lenders and banks are generally quite smart, one thing they’ll probably do is reclassify the loans they already have, they’re not going to want to back a failing business.”

MacCathmhaoil also hopes the fact the government is shouldering some of the risk doesn’t end up making loan processes assisted by the scheme overly bureaucratic.

While initial funding for the scheme is $2 billion over five to 10 years, a review of the scheme will assess whether the program should be expanded after a few years.

Council of Small Businesses of Australia (COSBOA) chief executive Peter Strong says the fund will bring “common sense” back to SME financing.

“It’s a game-changing announcement,” he tells SmartCompany.

“For SMEs that want growth this is really good, I know people that have flown to England to get a loan, it’s just bizarre.”

MYOB, which provides small business lending through its platform, also welcomed the policy in a statement on Wednesday.

“Providing non-bank lending through innovative fintech companies opens up a whole new ecosystem of financial services,” chief executive Tim Reed said.

Commercial growth fund backed

Government support for Carnell’s commercial growth fund, which mirrors similar schemes in the UK and Canada, will place additional pressure on banking regulator APRA to adjust the rules to enable the fund to exist as a financial product.

APRA needs to intervene to create a risk rating for the program because small business finance is an inherently high risk.

If approved, the commercial growth fund will aim to bring together private lenders from across the economy, including banks and superannuation funds, to create a mechanism that will provide capital to SMEs with high-growth prospects.

The scheme was detailed in a June ASBFEO paper and intends to target the 10% of small businesses which can scale up quickly with access to affordable finance.

MacCathmhaoil says a business growth fund-style initiative could be just what Australia needs to address the long-term financing needs of many SMEs.

“There’s a disconnect between the funds available to invest and the appetite to invest,” he says.

NOW READ: More financing pain in store for small business amid the fallout from the banking royal commission

NOW READ: Behind the 500% increase in small businesses using marketplace lending

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Michael Kaff
1 year ago

Great news on the surface, especially for Small Business. As long as SMEs, especially Small Business, can easily access fiance and there’s not more red tape.

It’s great to have incentives such as $20,000 instant write-offs, but if you can’t access capital to fund such purchases the instant-write-off is not much use to you, is it?

This Commonwealth Fund will certainly help in that regard.

http://www.mkaff.net

BadScience
BadScience
1 year ago

I may be wrong, but it has the smell of a scam-magnet about it.

“Free Lunch” economics distorting the playing field – another mess in the making.

Surely there are better ways of encouraging businesses than putting out a pot of money?

Michael Ratner
Michael Ratner
1 year ago

Believe it or not – Many small business and business people do go bust. Some deserve it and some don’t. Of course some are worth supporting and some aren’t.
Of course commercial considerations come into this and that’s where this new initiative needs some guidance.
The qualifying criteria is easy. Established businesses where the owner has been trading for many years and has all his assets on the line ( you know those assets that have been undervalued such as mortgages) and even though there might be a little leeway or something left, let’s call it bridging finance normally gets a lot of businesses over the line.
Banks have been risk averse when it comes to small businesses and they have helped create a Fintech industry where interest rates start at 12% and go up from there to some silly amounts.
Yes it’s explained away because they are high risk. They might not be as high a risk as they appear to be. Bear in mind that the owners have 100% of everything on the line and the only negotiating tool they have is the difference between what they currently owe and the real value of the assets they have normally a disparity of around 30%.
So they resort to using credit cards at around 20% or now fintech at about the same or more.
Yet it’s still possible to get a mortgage at an expensive 5% which means there are funds available and it’s the perceived risk and availability of funds at these high interest rates if the fund are available that cause the cash flow problems this idea is mooted to solve.
In the right context presuming $100K is needed …. this injection will create employment, tax, consumption, optimism and a chance. The alternative is to close up or go insolvent, remembering when the business goes insolvent it means shrinking of the economy and $40K to liquidators at least. And you would be amazed at the number of successful continuations that do occur.
This new idea is the sleeping giant of small business growth and could be endless provided the qualification criteria are met and these are still to be determined.
Successful trading record, good credit history and people with the right nous to know the difference between genuine with some hope or genuine but still no hope.
Bring it on and quickly.

BadScience
BadScience
1 year ago
Reply to  Michael Ratner

Michael, you are drunk on your own fancy jargon – just what are you suggesting?

I run a small $2m company that has operated for over 60 years – the business is internally financed by the owners – we have no loans. I drive an 8 year old car, and live in an $850 k house, with no other financial assets.

We employ half a dozen terrific people, produce import replacement goods, and get by OK. We pay our taxes in full and on time.

So you’re suggesting start-ups are given my (and my staff’s) tax dollars to threaten our own survival with? That is simply not fair, to put it mildly.

There’ll be people like me deciding to leap off the treadmill and go on the pension. That will undo the pork-barrelling income redistribution.

Of course the lazy entitled magical thinkers will lap up the stolen money. That’s what they do.

If the politicians believed this will work, they would invest their generous super funds in these risky ventures, not our hard-earned tax dollars.

But no signs of that! Wonder why?

Must be a fun job “robbing Peter to pay Paul”. Pay’s pretty good I hear.

Michael Ratner
Michael Ratner
1 year ago
Reply to  BadScience

With all humility, appreciate your reply and I’m in a similar position to you. Have never worked with bank finance, drive an 8 year old car and don’t even own a house – I rent … because 15 years ago had to finance a new business and didn’t feel like begging or explaining to the current providers of finance at the time.

Have banked with Commonwealth since inception and cannot get to first base if I needed bridging fiancé or something came up that would be advantageous. Constantly conscious that I am at the whim of predators and the only asset I have is a viable business, also doing about $2m in turnover with a stock holding of about $2m.

I wasn’t particularly concerned about start ups as know this is Ned Kelly country but more concerned about the like of yourself and myself who have a great track record, positive balance sheet and everything else that people would like to have and I’m in the hands of fintech lenders if I need extra capital because I don’t have a fixed asset.
Even if I was prepared to sign over my entire business with the banks I do not fit their matrix and that is history and morality count for nothing and if I was to default on their lousy hundred grand if needed I would lose millions if it didn’t work. So yes I would be risking everything.
And that’s why a fund that understood where established businesses stand who pass the criteria could really benefit the total economy through flow ons.
There’s no fancy jargon in my words and I’m not sounding off because of my personal circumstances – I walk in other peoples shoes and really understand what our type of businesses are going through.
Yep we all at times want to paddle our own canoes but this is not one of them. And start ups need consideration as well but it’s the established businesses whose owners like you dream about leaping off the treadmill and going on the pension. The economy needs US.
Best
Michael

BadScience
BadScience
1 year ago
Reply to  Michael Ratner

Hi Michael – certainly sounds like we are in similar boats. Appreciate your thoughtful reply. Isn’t it said that a banker will loan you an umbrella on a sunny day?

My take is the banks are now tightening the screws to frighten the Royal Commissioner and bully the government (which is getting revenge by taking $2B of potential SME loan money off the banks’ monopoly board).

I have seen most of government assistance wasted on drowning startups – there never seems to be an audit of economic benefit, and no-one ever repays money acquired by fraud (I know of cases in the millions of dollars region).

No political party wants to know about such tasteless allegations.

Meanwhile, as I said, the politicians continue raping the sedated taxpayers with LBGQTI abandon. And they even seem to enjoy it!

You and I should do lunch … 😉

Michael Ratner
Michael Ratner
1 year ago
Reply to  BadScience

Good idea and I’ll even pay.
I’m in Perth – have no idea where you are so might save money.
While I have your attention – one other thing to take into account is the amount of money given out by government as grants.
I wonder if any of the recipients are required to complete some sort of return so as to indicate the billions wasted on fanciful blue sky schemes and more importantly approved by people who wouldn’t have a clue.
No need to worry – Us and I think many other salt of the earth business people will keep picking up the tab.

BadScience
BadScience
1 year ago
Reply to  Michael Ratner

Don’t know of any requirement to submit any return. No one genuinely wants to know what went wrong (or right).

I have seen instances of government agencies pushing entrepreneurs to cook up dubious business plans, which they then themselves approve.

Thus the business owner assumes they are on the right track.

As soon as the proverbial hits the fan, the public servants are off to their next victims.

(As I’m in Adelaide, lunch in the 5-star Ceduna Oyster Bar sounds fair …)