Finance Market Update - 23 November 18
The Australian government has initiated a $2 billion funding facility for SMEs as a response to businesses finding it harder to get loans or having to take out expensive loans. In this update we discuss what impact this might have for your business.
Small businesses are the engine of the economy
If SMEs (small-to-medium-enterprises) are the engine and the government is the mechanic, then during any recent scheduled servicing the oil has not been changed. Oil in this case is credit and credit for SMEs comes in the form of business loans.
Businesses have been talking about how the royal commission and a subsequent “credit crunch” has been making it harder to get loans, and finally the government is listening.
Privately business bankers from the big four which control about 80% of all business lending in Australia have noted servicing has become stricter and banks are less eager to lend due to fears over responsible lending laws and aversion to risk.
Publicly big banks are supporting businesses and continuing to lend but credit has slowed, and businesses are having to jump through more hoops to get the loans. Generally speaking banks still need property security for a business loan, while many fintechs do not.
The government has also been talking to big business about a huge issue many smaller businesses face, late payments from customers. Late payments can cause serious cash flow issues for SMEs especially if payment terms blow out to 60 or even 90 days. They have yet to announce a formal program to combat this, but it is likely.
Fintech’s to get alternative funding line
Under a new proposal announced 14th November from the Morrison government they will be setting up a $2 billion-dollar funding scheme that will ultimately allow lenders, both banks and fintechs, to access funding in a more efficient way which aims to reduce their costs and thereby the costs for businesses to borrow.
The technical inner workings of this scheme are complex and modelled on a scheme the government introduced during the “GFC” in 2008 which was written by the brilliant Christopher Joye.
Essentially the program will involve the government buying bonds that are made up from a pool of small business loans which results in lower funding costs for the lender that did those loans.
This is particularly exciting as at Skyward Financial we are often talking to businesses about managing cash flow and how to access debt capital and not put the family home down as security.
The important thing to note on the scheme that the government is not replacing the private sector funding currently used it is opening up more funding to smaller banks, non-bank lenders and fintechs to offer business loans to SMEs and be more competitive.
Under the proposed scheme second tier lenders and fintechs will be able to access a government funding line which should be cheaper than current sources of funding which the government wants to translate into cheaper and more readily available loans for businesses.
This kind of facility has done will in the UK and there is no evidence it should not work at least as well here in Australia. So with the advent of government funding and fintechs willing to and able to take market share from the big banks, SMEs are entering into a period of liquidity
Fintechs currently charge very high effective interest rates (30%+). This is partly to offset their losses on loans they write because they lend on an unsecured basis, which means if a business borrows and goes bust, they don’t get anything back of have any security to claim, and because their current source of funds comes from private, institutional or capital market investors. So with cheaper funding from this scheme hopefully will come cheaper rates.
Skyward Financial works with major banks, small banks, non-bank lenders and fintechs and can provide businesses consulting on strategy, growth and debt capital. So if you have any questions on business loan options contact us today.
Government putting money on the table
The second fund announced is aimed at providing small businesses with passive equity for growth. This fund is different from the small business loan fund, in that it “invests” money directly into a business.
The business would benefit from this capital injection and would not have to give up equity or take on more debt, which would accelerate growth.
From 2011 the UK has had a business growth fund operating the same process and it has invested $2.7 billion into a range of businesses and sectors. Hopefully a similar result will happen in Australia.
Questions or comments? Contact us today