It’s been a pretty tough year for small business, credit conditions have continued to tighten and general economic conditions are failing to help ease the burden. Pleasingly, last month Treasurer Josh Frydenberg acknowledged this plight and has pledged to alleviate the pressures as much as possible. There are over 2 million small businesses in Australia and as the backbone of our economy it’s essential for all of us that they maintain financial capacity to operate, expand and grow. If you’re a small business owner you understand this and have probably felt the impact personally. For context, let’s take a look at three key reasons that have contributed to this situation and then of course, the good news!
Three Key Reasons Impacting Small Business Lending
Business or Personal?
According to the RBA’s Michele Bullock, there’s an increasing ‘blurred line’ between small business credit and personal lending. The requirements for lenders providing funds to consumers are more restrictive than lending to a small business. This would be okay, however lenders are increasingly categorising small businesses as household borrowers… More on this later!
Exacerbating this issue is a reliance on house prices, which have been under pressure over the last 12 months. With nearly half of SME loans secured by residential property, any negative shock to house prices will impact the credit availability of those small businesses.
Banking Royal Commission (BRC)
The BRC helped expose the Big Bank’s approach to lending, or lack of. All the Big 4 Banks resisted attempts to provide increased visibility of their processes and criteria. This makes it very hard to understand how banks are making decisions around small business loans. What we do know is that they are adopting an increasingly conservative & protective way of lending… not good for SME’s!
TheGood News for Small Business Lending!
First of all, house prices are recovering, and with further rate cuts expected from the RBA, this is likely to continue over the short to medium term. That’s one sigh of relief. We also have Treasurer Josh Frydenberg acknowledging the issue and taking steps to promote much needed action in the space.
Announced last year, the government is pushing to launch a $2 billion ‘Business Securitisation Fund’ aimed at supporting Non-Bank providers (great!) supporting much needed competition in the small business lending industry. Realistically, this probably won’t have a massive impact, due to the sheer size of the current lending gap. However, it IS one step in the right direction.
More significantly, in an announcement last month, Mr Frydenberg has stated he will instruct ASIC to tell banks not to apply responsible lending standards to small business loans. This will essentially help bridge the gap for businesses financing themselves via restrictive consumer loans.
He clarified,”If the loan is predominantly for a commercial purpose or an investment purpose, it doesn’t fall within these [consumer lending] guidelines,” effectively removing the burdensome restrictions on what should be productive business lending.
“If the loan is for a commercial purpose or an investment purpose, it doesn’t fall within these consumer lending guidelines”
A move in this direction has been called for by the Small business ombudsman for many years. Whilst banks have been applying consumer responsible lending criteria in even greater rigour since the start of the BRC, it is clearly not appropriate or relevant to the small business environment. Now, with the authority of the Federal Treasurer, it seems very likely that the restrictions on small business lending will be lifted significantly in the near future as banks have been given a pass to take on some additional risk in this area.
The Impact on Unsecured Lending
Whilst the majority of small business loans are secured against the family home, there still remains a substantial need for unsecured funding. These recent developments help clarify and alleviate concerns regarding the blurred line between consumer and business lending, however, they do little to directly improve access to unsecured loans. The big banks remain risk-averse in this area and you won’t have much luck getting unsecured funding unless you’re selling your soul for a small loan as an existing customer.
“You won’t have much luck getting unsecured funding [from a bank] unless you’re selling your soul for a small loan as an existing customer”
These changes may encourage the banking industry to take on more risk in this area, it’s unlikely they’ll look to compete with the many specialist small business lenders already in this space. These non-bank lenders are agile, customer-focussed and know how to address this unmet need in the market. To hear more from me about unsecured business loans and what you need to look out for, check out this short video clip:
The Takeaway Message for Small Business Owners
Things are looking up for small business lending. Whilst recent history has been difficult due to a combination of factors, the government is taking positive action to clear up uncertainties and ensure a more appropriate assessment framework for productive small business. The easing of restrictions means that your new Disney+ subscription or Uber Premium rides will not be required details in your business loan lending assessments moving forward. Here’s to faster decision making and better access to funding for small businesses in 2020!