The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has urged the government to create a fund that caters for the lending needs of small business owners across the country.
In a submission to the Productivity Commission’s Inquiry into Competition in the Australian Finance Industry, ombudsman Kate Carnell said there “was almost a complete asymmetry of power in the relationship between banks and small business borrowers”.
Thanks to prudential rules brought in since the global financial crisis, Australia’s banks have focused lending against real property security instead of financial aspects of small business such as cash flow, she said.
“The prevailing focus of bank lending against real property security has the effect of increasing the cost of capital on other lending. It has also contributed to reducing the ability of small business to obtain funding secured against other business aspects such as cash flow.”
Restricting finance for businesses with limited access to property has come at a cost to small businesses and family enterprise, Carnell said.
“The focus on 'bricks and mortar' funding is constraining capital for businesses with good cash flow and business prospects, but lacking in real property holdings that may be mortgaged. As a result, for many small businesses funding is simply unavailable at a reasonable cost.”
The Ombudsman floated two proposals to tackle this issue. First, she suggested the Productivity Commission explore whether prudential standards are ‘too tight’ from a risk perspective and any flow on effects this would have on bank lending to small business.
Alternatively, a government-backed approach could be used to assist SMEs similar to the Commonwealth Government Clean Energy Finance Corporation (CEFC).
“The [CEFC] was set up because of the barriers to entry into clean energy and the need for a bank-friendly business case in order to entice banks to lend in this area. Banks and the CEFC share the risk on these loans.”
This could be a useful model to emulate and provide government-backed small business loans, Carnell said.
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