Kate Carnell’s plan to close the small-business funding gap

Ombudsman announces 8 recommendations to improve small-business access to finance.

An investment fund established by the private sector and a new Government Guarantee Scheme are among the recommendations made by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell to improve access to finance for small businesses. The recommendations come off the back of the April 2018 inquiry, Affordable Capital for SME Growth.

On releasing the report on 29 June, Carnell said small businesses were seen as high risk and so lenders usually only offer property-secured loans or offer higher interest rates. This has resulted in businesses finding it difficult to access finance and preventing business growth.

The report outlines how small business difficulties in finding finance can be overlooked. Figures from the Australian Bureau of Statistics (ABS) found that 15% of businesses apply for debt or equity finance, of which 90% are approved. However, the report says this "does not capture the SMEs that do not get as far as making an application."

The ABS figures compare to survey results from broker MoneyQuest Finance Specialist, which found that 46% of inquiries with brokers do not go further than initial conversation. Of the 54% referred, 41% are not approved.

While the Banking Royal Commission did look into some of the issues facing small businesses in banking, Carnell said this may lead to "unintended consequences".

“Unfortunately, the unintended consequences of the financial services royal commission for SMEs might be an increase in banking regulation, making it even more difficult for them to access affordable growth capital.

“I regularly remind people that SMEs are the engine room of the economy, but the engine won’t work without petrol, which is seed capital and growth finance."

To ensure small businesses have fair access to seed capital and growth finance, the report outlined eight recommendations:

• Business growth fund. The report called for the private sector to establish an investment growth fund. The fund will focus on long-term funding and will offer debt and equity options for growth. The report recommends amounts to be offered ranging from $250,000 to $5 million with terms of up to 7 years secured to the business.
• Government Guarantee Scheme. The report also called for the government to establish a Guarantee Scheme where member banks can draw on the guarantee as a form of security. This will help SMEs that do not qualify for bank funding due to insufficient real estate, need a longer loan term or operate in a sector where the lender has restrictions.
• APRA prudential measures. The report recommended that APRA move away from a "one-size-fits-all" model. APRA regulations are currently based on the international framework for banks. However, this means that for all unsecured loans a risk weighting of 100% is applied. By changing this, lenders will be able to apply risk weighting to specific risk factors.
• Capital Enhancement Fund. The report also called for the government to establish a capital fund in order to provide two-tier capital instruments to the banks. This is to address the difference in the cost of funding for tier-two banks.
• Personal Property Security Register (PPSR). The report recommended that the (PPSR) be overhauled to allow a non-legally trained individual to correctly register assets. It's estimated that up to 80% of registrations are incorrect and the accuracy of a listing is often not questioned unless part of insolvency activities. This change will allow SMEs to best use their assets for security against lending.
• Finance-ready SMEs. The report also recommended that SMEs work with their financial advisors including book-keepers, accountants and other advisors to ensure their business is properly prepared to apply for finance.
• Open banking reforms. Another recommendation is for the government to implement the initiatives of open banking, including comprehensive credit reporting and the consumer data right in line with the outlined schedule. The report also recommends that the benefits of these initiatives be "widely promoted" to SMEs.
• SME guide to financial products. The report also recommended that the Ombudsman develop a short guide on what financial providers and financial products are available and what businesses suit those products according to business life cycle. This will then be distributed through SME advocate networks and social media.

Scottish Pacific's chief customer officer Ben Cutler welcomed the recommendations, specifically highlighting the plans to develop a financial products guide.

“As the ASBFEO report indicates, and our own SME Growth Index research and 30 years’ experience of working with business owners shows, SMEs can become “rusted on” to their banks,” Cutler said.

“It’s great for business owners to have wide funding choices and any effort the Ombudsman makes to put more options in front of SMEs, such as an SME Guide to Financial Products, is very welcome.”

Read the full report here.

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