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Queensland Economic Advocacy Solutions

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Small businesses continue to experience finance difficulties

Access to finance has a profound influence on a businesses’ capacity to grow and since the GFC major banks have become more risk averse and conservative in their business lending.  This has given rise to Queensland businesses experiencing a range of difficulties including accessing finance on acceptable terms, both in terms of cost and appropriate levels of security.

The RBA has recently examined this issue and has confirmed this is still very much a burning issue for business. The message from their work is that many small businesses find it challenging to access finance. While conditions are better than they were in the period just after the GFC, around one-fifth of businesses report that they have found it relatively difficult to access finance. In addition, the proportion of small businesses that perceive it to be relatively easy to access finance has declined recently.

Unlike larger businesses, small businesses rely heavily on finance from financial institutions for their working capital and new capital expenditure e.g. on machinery, plant and equipment as well as opportunities for overall expansion. Enhancing the capacity of businesses to access finance goes  a long way towards increasing Queensland jobs.

While interest rates on business loans are near historic lows, there continue to be differences between the rates paid by small and large businesses. The spread of interest rates on small business loans relative to the cash rate has remained persistently high since the GFC.  

Small businesses highlighted the following key issues:

  • Access to finance for start-ups is very limited;
  • Banks are reluctant to extend finance without real estate as collateral;
  • The process to obtain finance is lengthy and onerous; and
  • Large businesses continue to impose onerous payment terms.

The banks emphasise that they are keen to lend to small businesses, but that unsecured finance is more costly due to the higher risk involved. There has been more funding available from private equity sources recently, but the supply of venture capital still remains relatively small in Australia compared to elsewhere globally.

Market participants have suggested some initiatives that could potentially improve access to finance for small businesses. In particular, comprehensive credit reporting and open banking are thought to have the potential to lower the cost of credit risk assessment for lenders and increase access to finance.

There are also efforts to improve the financial capability of small businesses, such as by encouraging better financial record keeping. The reliance on real estate as collateral in small business lending could be reduced by making it easier to use other assets as security, such as machinery and equipment.  Initiatives suggested by Market Participants include:

  • Improving the financial capability of small businesses;
  • Providing lenders with better information to make lending decisions;
  • Making it easier to use other non residential personal property as security;
  • Establishing an Australian Business Growth Fund; and
  • Government involvement in the supply of finance for small businesses

Banks have a responsibility to run their businesses in a manner that minimises risks that in turn delivers a profitable and strong foundation for their shareholders.  However Queensland businesses are looking to our lending institutions for offerings that focus on a strong economy as well.  This may be fanciful thought ….. but ultimately financial institutions in my view should have a broader responsibility for economic development in Australia.  This is just one of the many issues currently being played out in the Royal Commission.

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