A lack of awareness of increasingly diverse small business borrowing options available from new lenders, and a lack of trust in those lenders, are key constraints in SME access to finance, a new study argues.
The Productivity Commission has released a research paper, Small Business Access to Finance: The Evolving Lending Market, which reports that more than 90 per cent of the outstanding debt owed by SMEs is held by banks.
One of the report’s conclusions is that “some SME owners may anticipate difficulties in obtaining finance despite suitable offerings being available”.
The commission says financial education is needed to match SMEs with appropriate lending options or to get them to consider moving away from banks to obtain suitable finance – a role that brokers might be encouraged to take on.
It recommends that industry bodies representing SME lenders, such as the Australian Finance Industry Association, do more to gain the confidence of SME borrowers in new lenders.
The report cites a 2018 Scottish Pacific survey, which found that a quarter of SME owners would not consider alternative lenders because “they don’t know who they are”.
Another constraint the report identifies is the limited funding market for newer lenders. This issue has been recognised with a recent government initiative focusing on expanding the pool of available capital through securitisation.
However, this initiative has progressed very slowly. Since it was launched in 2019, the Australian Business Securitisation Fund has made just three investments – in Judo Bank, OnDeck and GetCapital warehouses.
To further advance developments in the non-bank SME lending market, the commission says government should focus on initiatives to promote information sharing, as it has done with the Consumer Data Right and comprehensive credit reporting.
According to the report, around 15 per cent of Australia’s 2.4 million small and medium enterprises applied for finance in 2018/19, mostly to a bank. Only 5 per cent applied for equity finance during that period.
Large SMEs had higher loan application rates: 27 per cent of SMEs with turnover between A$10 million and $50 million applied for finance in 2018/19, compared with 9 per cent of SMEs with turnover below $500,000.
At the same time, one in five SME owners said that a lack of finance hampered their business.
The commission says a surge of new lenders and products in the market is changing the funding options for SMEs.
“Combining new data sources with innovative analytical tools has given lenders the information and confidence to lend to SMEs without the security of property,” it says.
The commission describes these developments as “very significant”, offering SMEs more convenience and allowing them to respond quickly to business opportunities, as loan turnaround times are much faster. And borrowing without property collateral may allow them to take entrepreneurial risks.
“And for some SMEs, the new options may mean that borrowing has finally become possible.”
There are some gaps in the market. While fintech lenders can quickly approve relatively small SME loans, the Productivity Commission said there is a gap for unsecured finance between $250,000 and $5 million, with few lenders willing to offer these