As the big four banks firm up their commitment to the Australian Business Growth Fund by each pledging $100million – HSBC and the government will contribute $20m and $100m respectively – now is a good time to reflect on the fund’s importance to SMEs and the Australian economy.
“Where we are right now is that small businesses are strapped or they’re struggling,” explains Wayne Morris, CEO of Australian business lender Fifo Capital.
“They can’t go to banks, so instead their other option is to reach out to second-tier lenders. Now these loans are normally a bandage over a bigger problem. They may solve the issues today but they’re not going to benefit SMEs later down the line. They need longer term equity funding otherwise they won’t have enough capital to support their growth.”
A similar model to the UK
SMEs with an annual turnover between $2m and $50m will be eligible for the fund and shareholdings will be capped at 40% to ensure businesses can remain in control.
Morris further explains that this will give second-tier lenders the ability to pass on more affordable funding to their clients; and as cost of the fund comes down, SMEs will be presented with more opportunities to compete and grow.
The fund follows a similar setup to the one established in the UK in 2011 following the global financial crisis when banks stopped lending to the SMEs.
Morris was in the UK, and part of a government advisory directly connected to deploying and establishing the fund. Since he’s seen it work there, he knows that it is a credible policy.
“Over here it’s a very similar make up to the UK side with the only difference being that now the banks are involved. In the UK it was government money, but here the banks will be a big player in actually investing into the fund, so there’s an element of responsibility there for them. The banks will mentor highly credit worthy businesses to enable their growth.”
A change in the direction of lending
It is also expected that the funding will lead to more innovation in the second-tier lending space. Morris says that he wouldn’t be surprised if it also leads to an acquisition plan of sorts where banks bring up some of these lenders because they will see an opportunity to better represent themselves to the SMEs.
“I think you’re going to see a change in direction in lending, a lot more innovation in finance and more collaboration between banks and second-tier lenders,” he adds.
Earlier this year, when the fund legislation was first announced, treasurer Josh Frydenberg said, “With more than three million small and medium-sized businesses employing around seven million Australians, enhancing small business access to funding is part of the Coalition Government’s plan for a stronger economy.”