Many small businesses looking to grow still find it challenging to access finance, particularly without providing real estate as security. According to The Reserve Bank of Australia’s Access to Small Business Finance bulletin.
Lenders highlight that they are keen to lend to small businesses, but that unsecured finance involves more risk.
The entrepreneurs on the Reserve Bank’s Advisory Panel have highlighted the following key issues:
Access to finance for start-ups is very limited: banks are reluctant to finance start-ups given the high risks involved. Entrepreneurs often resort to using personal credit products (such as credit cards) to fund their day-to-day operations when they start their business.
Equity financing would often be more appropriate, particularly for start-ups, but there are relatively few avenues for such financing in Australia.
Banks are reluctant to extend finance without real estate as collateral: entrepreneurs looking to expand their business are concerned by the collateral and personal guarantees they need to provide to obtain sufficient finance. They find it difficult to borrow more than around $100,000 on an unsecured basis to support their day-to-day trading activities.
In addition, medium-sized businesses report that it is hard to obtain additional finance once they have pledged all of their real estate as collateral. As a result, many entrepreneurs delay expansion until it can be funded from retained profits.
The process to obtain finance is lengthy and onerous: entrepreneurs report that banks are reluctant to provide them with advice on how to obtain finance. As a result, they find it difficult to compare lending products and determine the one that would suit them best.
When they apply, they have to provide a large amount of information and documentation. The banks then take a long time to decide whether to extend the loan. This can be particularly problematic if the business opportunity is time sensitive.
While innovative non-bank lenders are offering products with streamlined application processes, the annualised interest rates on these products are often very high.
Large businesses continue to impose onerous payment terms: some large businesses require small business suppliers to accept payment times well beyond 30 days.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) drew attention to this issue in a report last year (ASBFEO 2017). In response, the Business Council of Australia published the Australian Supplier Payment Code, which commits signatories to pay small businesses on time and within 30 days.
However, some large businesses have not signed the code and their payments are frequently delayed well beyond this benchmark’.
For more detail see the Access to Small Business Finance bulletin on the RBA site.
The fallout from the banking royal commission, a downturn in the housing market and the prospect of rising interest rates are some of the factors combining to put a squeeze on SME lending.
Strict lending criteria and a requirement to provide property assets as collateral or sign personal guarantees for most bank business loans mean that many small business owners are investigating alternative types of debt finance.
Why Debtor Finance is an attractive alternative to bank loans
Debtor finance (also known as invoice finance) allows SMEs to access funding using their accounts receivable ledger as collateral. With no property security required, debtor finance allows your clients to turn their outstanding invoices into cash and obtain greater access to capital as their business grows.
If inflexible lending offers from the major banks are making it difficult for your clients to take their businesses to the next level, a tailored debtor finance solution could be the answer.
We can help with Debtor Finance solutions. Contact us or call on 02 9453 0300 for Equipment Finance, Commercial Finance or Home Loans.