The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has released a ‘Barriers to Investment’ report aimed at uncovering the factors impacting on small to medium enterprise investment, including access to capital, red tape and energy prices.
The report looks into how with some innovative thinking and policy changes the barriers to investment can be removed giving small small businesses confidence to grow and boost jobs.
Despite recent claims by bank executives that lending to small firms is booming, Ms Carnell said this wasn’t the case for borrowers who don’t have equity in property. “Traditional bank loans are backed by real property mortgages and although alternatives are emerging, they are not currently mature or affordable.” and “Young aspiring small business operators are particularly disadvantaged and increasingly rely on their parents to provide seed finance.” she said.
Australia’s 2.2 million small to medium enterprises (SMEs) employ two thirds of Australian workers and create a substantial proportion of new jobs.
Ensuring that businesses have access to capital is important for the growth of their businesses and to create jobs in the economy. According to ABS figures SMEs rely on credit for a number of business activities.
Key reasons why SMEs seek debt or equity finance are to:
- maintain short-term cash flow or liquidity;
- replace or purchase equipment or machinery;
- pursue expansion opportunities; or
- ensure the survival of the business.
Small and medium businesses have traditionally struggled to easily access required finance on competitive terms. CPA Australia reports less than half of the 508 small businesses they surveyed found it easy or very easy to access external finance in 2016.
Some possible reasons for the difficulties in accessing finance include:
- SMEs are characterised by high complexity but low scale, making the sector unattractive to less efficient traditional lenders given the high cost to serve each individual client;
- SMEs may lack the skills and resources to handle finance in a sophisticated or systematic manner;
- Traditional lenders view SME lending as risky, especially as in many cases there is a lack of fixed assets to secure against a loan, and SMEs may be more sensitive to macroeconomic trends; and
- Traditional lenders have regulation and prudential capital requirements for loans to SMEs.
The report also indicates that there are challenges for small business around disruption (eg Amazon, Uber, Airnb) and there is a need for proactive and sound Government policy so there is confidence in a level playing field.
However, the resounding feedback from the small business sector is that access to finance remains a significant barrier despite a healthy pipeline of businesses suitable for investment. The fact is, if there are barriers to accessing finance then this stifles business growth, employment and investment. The current market in Australia is simply not working for or meeting the needs of smaller businesses.
A key factor points to policy and regulatory settings that are having negative consequences on lending practices, capital availability and a competitive financial services market for SMEs.
You can download a copy of the full ASBFEO Barriers To Investment Report here.