It’s a story heard time and again from start-ups across Australia since the global financial downturn – the banks simply aren’t lending money to help businesses get up and running.
These days, securing funding from banks without offering up property as security is incredibly tough for small businesses, let alone new entrepreneurs with no trading history.
“There are huge restrictions on small business funding if you don’t have equity in a house,” says Marc Peskett, partner at business advisory firm MPR Group. “If you don’t have any sexy technology that investors want, it’s tough.”
“I think the situation has got worse in recent years. We’ve got a situation now where the tax office is acting as an unofficial lender through their returns, but that is also getting harder.”
“Not every business deserves to be funded, of course. But there are some good ones out there that aren’t being backed and there just isn’t enough investment money around in this country.”
The question is – what to do about it? The UK government recently revealed it will look to set up a bank specifically for small businesses, only for both the Australian Federal Government and the Opposition to restate their dislike for such an idea Down Under.
Here are three non-small business bank ideas that could be deployed in order to get lending flowing to deserving start-ups again:
1. Tax incentives
The most obvious way to get banks – and other investors, for that matter – to stump up cash for job-creating innovators rather than drive up property prices by ploughing cash into bricks and mortar is to provide a tax incentive to do so.
A model for this already exists in the UK, called the Seed Enterprise Investment Scheme.
Under the scheme, investors can receive a tax deduction worth up to 50% of investments of up to 100,000 pounds ($153,000) a year. If they don’t put in the full amount, any surplus may be carried back to the previous year.
“This could make banks see small businesses as less risky,” says Peskett. “It would also encourage successful people to engage with the SME community.”
“In the US, successful entrepreneurs are lauded and put money back into start-ups. People here tend to make their money and then play it safe by putting it into property and the share market.”
“You can’t force these people to invest, but you can educate and incentivize them.”
2. Embracing other funding options
Most bank funding of small businesses in Australia comes in a fairly standard form: SME requests a loan, bank provides the money with an interest rate, with a hefty asset – usually property – used as security.
As property prices rise, however, housing is becoming harder for entrepreneurs to borrow against. Plus, it seems a little unfair that you should have to risk the roof over your head to fund a business that you’re probably running in a different suburb.
A potential remedy is for banks to explore alternative funding options. For example, while debtor finance is popular in the US and Europe, it is very much a niche option in Australia, with several of the big banks recently withdrawing their specialist divisions that dealt with the sector.
Debtor finance is where a business borrows against its accounts receivable ledger. For firms with 30-day payment terms with customers, this can be a helpful way to avoid a cashflow crunch.
Rob Lamers, head of debtor finance at Oxford Funding, says that the industry is growing in Australia, but is still not seen as an option by many banks or businesses.
“The sector is growing by about 15-20% per year and it’s becoming more popular because it’s not secured to property and it’s seen as a better solution than overdrafts,” he says.
“In the US and Europe, it is seen as mainstream, so we just need a mindset shift here. It’s a specialist area though, so if the big banks don’t have the expertise, it’s a challenge.”
3. Better communication
It would be nice to think that Australian banks would take a look at the proactive funding environment in the US, or notice the increasing numbers of Aussie start-ups that are securing fame and fortune overseas, and decide that they are missing a trick by not getting involved.
Alas, this is unlikely. However, there is much to be said for greater communication between banks and small businesses, so that each party knows where the other is coming from.
“The banks are very much focused on small business cashflow as the basis for lending decisions rather than the expectation of capital growth,” says Bruce Billson, the federal shadow small business minister.
“This has proved particularly challenging for a number of small businesses as they adjust to these new credit assessment requirements of the banks.”
“We think banks can do more in explaining what it is they’re looking for [from] small businesses to satisfy their funding requests.”
“Broadly, we think helping the economy and small businesses recover will provide the incentive for people to invest and set up small businesses.”
“Small businesses are telling me many are on their knees. As soon as there is some finding in the media about a particular sector or region or type of business running into new headwinds, the banks are quick to call in a small business owner to go over the nature of their business.”