The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, has proposed a new private-sector fund, as part of a package of reforms to kick-start business credit growth.
The Affordable Capital for SME Growth report, released by the ASBFEO’s office last week, highlights banks’ requirement for SMEs to pledge property security against loans, and their short-term nature, as restricting growth.
The report results from an inquiry by the ASBFEO’s office into international and national initiatives implemented since the global financial crisis to increase the supply of capital to SMEs for growth.
“The inquiry follows our Barriers to Investment study last year, which identified a funding gap where SMEs do not have access to the finance they need to start or grow their businesses,” Carnell said.
“The UK, Canada and the US – jurisdictions similar to Australia – have addressed this market failure, which is worldwide, with successful initiatives that have increased access to affordable growth capital to SMEs,” Carnell said.
She noted that the Productivity Commission’s draft report into competition in the Australian financial system and the Reserve Bank of Australia have also identified the funding gap for SMEs.
“In Australia, lenders consider SME’s high risk and offer capital with restrictive terms and conditions, at high interest rates and demand bricks and mortar as security – which is usually the family home.
“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,” she said.
ASBFEO has made eight policy recommendations in the report, outlining initiatives to increase the supply of capital, and inform and prepare SMEs to be finance ready to address the market failure.
On the supply side, the ombudsman suggests creating two new funds, one backed by the private sector and a second by the federal government, to improve SME access to long-term funding.
“A Business Growth Fund should be created and operate commercially and independently of the government, offering loans and equity investment for amounts between $250,000 and $5 million,” the ASBFEO said. It suggests an initial pool of capital of $1.5 billion be sourced from the Future Fund, superannuation funds and banks, and for its loan and investment decisions to be made by professional managers.
Another recommendation is for the government to create a Capital Enhancement Fund that could provide a new pool of capital for non-major banks to raise “tier two”, or hybrid debt. The fund would purchase the notes from the banks at a set rate of return, which would be reduced if the bank lifts the amount of new small business lending.
On the demand side, the ombudsman’s recommendations include initiatives to help SMEs prepare their business to seek capital, and raise their awareness of alternative sources of finance outside traditional banking.