The entrepreneurs struggling to get loans revealed: Ombudsman calls for overhaul on small business lending

The small business ombudsman has called for an overhaul of the systems that provide finance for SMEs, warning that some Australians are putting their retirement savings at risk by providing seed funding for their children’s businesses when they fail to obtain a loan.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) released its Barriers to Investment report this morning, citing the benefits of a government-backed bank similar to the British Business Bank when it comes to providing businesses with stable access to finance instead of relying solely on the big banks.

Small business ombudsman Kate Carnell highlighted that after months spent speaking to SMEs about their access to finance, key problems with the current system have become obvious.

The report highlights that younger business owners report being unable to access finance from the banks, which ASBFEO puts down to the value banks place on having equity in property, which many young founders don’t have.

This has led to more companies reporting relying on the ‘bank of Mum and Dad’ for finance, which in turn Carnell says puts retirement savings of parents with adult children at risk.

“It also raises social equity issues, because the children of affluent parents have greater opportunities to buy and grow businesses,” Carnell says.

The ombudsman’s office has said there are few detailed statistics on how many small businesses secure access to finance on terms that are reasonable to them.

While data from the Australian Bureau of Statistics suggests nine out of ten small businesses report having successfully secured debt finance in 2015-16, this is not in line with what the ombudsman’s office says it has heard anecdotally while researching the issue.

“One possible explanation is that the data does not account for SMEs that do not apply for loans fearing that it will be difficult to obtain (e.g. due to poor credit history or a lack of assets to use as security for the loan,” the report suggests.

The rise — and risks — of fintech

The report highlights the volume of alternative finance in Australia has ballooned to $US348 million ($456 million) in 2015, up from $24 million in 2013. Fintech companies have also increased from 100 to more than 500 over the past five years, with the pool of fintechs offering lending to small businesses growing significantly over the past few years.

“But with the massive growth in the number and variation of fintech products, it becomes more difficult for SMEs to make informed decisions about which products and lenders will suit their circumstances,” the report says.

Last month, Carnell told SmartCompany it was vital small businesses be “really careful” when reading loan terms from alternative lenders, given she had seen many variations and this was potentially confusing to businesses who are desperate for funding.

Meanwhile, there is a steady pipeline of candidates in Australia ready for private equity investment, but the ASBFEO report suggests Australia’s superannuation system isn’t interested in investing in private businesses.

“A key element of the problem is that Australian superannuation funds account for less than 0.5% of superannuation fund assets invested as PE,” the report suggests.

Against this backdrop, the office has returned again to the possibility of a government-backed finance initiative, highlighting how the British Business Bank has tried to overcome some of the barriers small businesses face.

The government owned-setup partners with banks, leasing companies and private equity to facilitate loans specifically to smaller companies.

Off the back of these observations, the report poses nine policy questions for the way forward, including whether the prudential requirements of lenders are actually slowing growth across Australia’s economy.

Read the full report here.

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