Unpaid tax debt a barrier to SME financing potential

The RBA’s Small Business Finance Advisory Panel said one of the major issues preventing the improved financial capability of small businesses is that many of them don’t pay their tax obligations on time, and effectively use that money as a relatively cheap form of finance.

The panel noted in its Access to Small Business Finance bulletin how the Australian Taxation Office offers payment plans for small businesses “at concessional interest rates that are often cheaper than bank finance”.

“In 2016-17, the ATO negotiated 650,000 tax debt payment plans for small businesses; this implies that a significant proportion of small businesses could be on tax debt payment plans,” the RBA said.

“These payment plans help small businesses to manage their cash flows, but businesses also need to be aware of the longer-run implications of maintaining tax debts.”

The RBA also highlighted concerns from lenders about the relatively low level of financial capability among small businesses applying for finance.

It cited statistics from the Australian Small Business and Family Enterprise Ombudsman that up to 45 per cent of small businesses do not use accountancy software to maintain up-to-date and accurate financial records.

“Market participants suggested that with better accounting processes, these businesses could more easily produce evidence of their financial performance when they apply for a loan,” the RBA said.

The ASBFEO Kate Carnell agreed with the concerns brought up by the RBA bulletin.

“The report highlights the absence of entrepreneurial finance, with lenders wanting real estate – normally the family home – as security, or alternative lenders offering short-term, high-cost capital,” Ms Carnell said.

“These issues stifle business growth, employment and investment.

“If the financial services sector would change the way it thinks and does business with SMEs, then businesses could seize new opportunities in markets and strengthen their competitive position, which would in turn have a considerable benefit for Australia’s economy.”