SMEs face cash squeeze as strict lending returns

SMEs are experiencing a finance crisis due to the scarcity of lenders and a return to strict lending criteria, according to the Mortgage & Finance Association of Australia.

The MFAA, which represents around 1,000 finance brokers who raise debt facilities for SMEs, says recent feedback from finance brokers suggests difficult times for their clients.

According to the MFAA, company directors outside the corporate economy are putting up their family properties as collateral, as the major banks return to dominance in business lending.

MFAA chief executive Phil Naylor says SMEs are being forced to raise capital from a decreasing number of lenders, with tightened criteria excluding many of them from mainstream borrowing.

Naylor says brokers unable to attract funding from mainstream lenders are relying on private lenders, which charge interest rates of up to 20%.

“Many of the smaller banks and the non-bank lenders have left the SME market, especially when it comes to property developing and office equipment and fit-outs,” Naylor says.

“That leaves the large retail banks with most of the market.”

Naylor says finance brokers are frustrated that cashflow lending, where the decision to lend is made on the quality of the business and the receivables, has been dropped in favour of a return to fully secured lending.

Secured lending focuses on the quality of the collateral, not the business.

“The GFC created a liquidity issue in our banks, and in response most of them have re-absorbed their business finance arms into the main operations of the bank,” Naylor says.

“It means experienced business lenders, who negotiated deals with brokers on their business merits, are now subject to more conservative practices.”

The MFAA says it’s obviously easier to get business finance for an existing business rather than a start-up because lenders tend to view start-ups as “inherently risky”.

One way of getting around this is by entering into a franchise because while the business may be new, it is based on a proven formula.

Naylor says while there’s nothing wrong with banks being careful with their lending, SME debt finance is an important part of the economy and the MFAA would like to see more competition in this area.

The MFAA’s concerns are substantiated by Reserve Bank of Australia data, which shows lending to businesses declined by 1.7% in the year to February 2011.

The RBA says the four major banks controlled 86% of the SME debt lending market in September last year, yet they only wrote 74% of all business loans.