“Game-changing” government plan pledges $2 billion for capital-starved SMEs
Wednesday, November 14, 2018/
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.