Report highlights key financing barrier for new SMEs

In its report, Competition in the Australian Financial System, the Productivity Commission said that what is often termed as the ‘small business access to finance’ issue may be more accurately described as the ‘new business finance’ issue.

It said lenders have insufficient information on new businesses to adequately assess the risk, as they are often established by owners with limited business experience, with limited assets and without a proven business model or track record for that business.

Due to their lack of financial history, the Productivity Commission said new businesses are often faced with having to use a residence as collateral, in the absence of other collateral, or being offered unsecured finance, usually credit cards.

Because of this, there was a gap in the market between the interest rates charged for residentially secured mortgages and the much higher rates charged for unsecured finance such as credit cards.

Further, the Productivity Commission said that, as of March this year, the interest rate gap between residentially secured small business term loans and low rate credit cards was over six percentage points and over 13 percentage points for standard rate credit cards.

“Any gaps in lending to new businesses appear to be the result of a lack of adequate information on which lenders can make an informed assessment of the risk,” the report said.

“Being new, these businesses do not have the ability to demonstrate their ‘credit worthiness’. New businesses are difficult for lenders to assess — until a business is at least 2 years old there is inadequate trading and financial information to assess the ability of the business to service the loan.”

The Productivity Commission said that if meeting this gap were profitable and there were no regulatory impediments, it would be expected that existing lenders and new lenders, such as fintechs, would develop the products to do so.

It added that the recent arrival of ‘challenger banks’ with a focus on SME lending may now induce others to attempt to fill this gap.

Last month, the Institute of Public Accountants threw its weight behind a report from the Australian Small Business and Family Enterprise Ombudsman for reinforcing many of the sentiments it has held in the past around the struggles small businesses face in accessing financing.

“Our research confirms that small business continues to have problems with access to finance and capital; critical elements to support healthy cash-flow that underpins growth opportunities," said IPA chief executive Andrew Conway.

“Australia must do everything in its power to support small business productivity and growth for the sake of our economy."