Is Australia Doing Enough to Improve Access to Capital for SMEs? A comparison with the United States.
According to data from the Australian Small Business and Family Enterprise Ombudsman, small business employs over 4.7 million people, accounting for 41% of the business workforce, making it Australia’s largest employer. Small businesses also contributed around $418 billion to Australia’s GDP in 2018-19, equivalent to 32% of Australia’s total economy. SMEs are the lifeblood of the Australian economy, yet, due to a higher default rate on loans¹, they are generally considered to be of a higher risk to lend to then large businesses and individuals.
The aim of this report is to see if Australia has been doing enough to improve access to finance for Australian SMEs by comparing its lending initiatives with another developed economy in the United States. It’s impossible to ignore the impact COVID-19 has had on economic outlook and business lending practices but a lack of access to finance has been a major concern for small business owners long before the pandemic hit. With that in mind, we look at the state of small business lending both pre and post the coronavirus pandemic.
It must be said, the COVID-19 pandemic has had a much more severe and long lasting impact in the US than it has in Australia. Combined with the fact it has a much larger economy, naturally we expect the SME support measures to be much greater in the US. This report therefore will not focus so much on the scale of response but the response mechanisms decided on and the characteristics found of the small business lending market in each respective country.
Due to the lag in data releases by the Reserve Bank of Australia and Australian Bureau for Statistics, we are not able to access all data through to the end of 2020. There is still plenty of insight we can gather on the wider lending market in Australia over recent years, and combined with some recent SME surveys, we can also get a feel for the impact COVID-19 has had on SME accessibility to finance.
The View of Aussie Banks
Ask the big banks and they will tell you that the problem is not a lack of capital being available, but a lack of demand from SMEs for loans. In a press release in October 2020, CEO of the Australian Banking Association, Anna Bligh, commented “The banks’ commitment to small business has been supported by a number of Government and regulatory measures, including the RBA’s Term Funding Facility, changes to business lending rules, the instant asset write-off, and the SME loan guarantee… Australian banks are continuing to provide a lifeline to small and medium businesses across the country. The rate of lending has held up strongly despite the pandemic.” From 1 Feb 2020 to 7 Oct 2020 banks had loaned $41 billion to small businesses during COVID-19 with an approval rate of roughly 70%. Equating to around 500 new loans a day to the tune of $215 million.
A survey conducted in mid May by the Australian Bureau of Statistics further supported the view of the big banks as around only 1 in 10 businesses reported seeking additional finance as a result of the pandemic. What the data from the Australian Banking Association failed to show, however, is how the 2020 figures compare to the value of small business loans issued in previous years. Nor does it provide insight into those SMEs who were struggling to access finance even before the pandemic. Data from the Reserve Bank of Australia provides information into the total outstanding loan balances currently held by small businesses. This is different to the level of new loans issued but provides insight into the overall use of new and existing credit facilities by Australian SMEs.
Data Source: https://www.rba.gov.au/statistics/tables/ Lending to Business, D14
The data above shows us that whilst the level of outstanding loans hasn’t changed significantly, it has actually declined from mid-2019 to the end of 2020. Notably, it demonstrates a continued fall in the level of loans outstanding to small business from $145,454 million in November 2019 to $141,902 million in April 2020, suggesting SMEs were unable to access finance during Australia’s first economic shutdown, beginning in March 2020. Small business lending volumes appeared to hit their peak by the end of June ($145,716 million) though continued to fall throughout the rest of the year. The fall in lending volumes appears to contradict the view of the Australian Banking Association – small business lending was down throughout the year at a time when you would have expected it to increase. Particularly when you consider a loan approval rate of 70%, it still leaves around 3 out of 10 businesses who seek finance left wanting. With approval rates in Australia generally around 3 out of every 4 small business loan applications, it also suggests a small reduction in approvals throughout the most severe times of disruption as a result of COVID-19.
Perhaps one of the influencing factors in credit uptake has been the adoption of alternative government support measures for SMEs in response to COVID-19. In mid July, about 40 percent of businesses surveyed by the ABS reported that they were accessing the various support measures which include the JobKeeper program and tax credit initiatives. Compared to just 18,000 small businesses who had attained business finance through the SME guarantee scheme until September 2020 (which sees 50% of the value of a small business loan secured by the government). Meaning only $1.7 billion had been issued through the $40 billion SME guarantee scheme.
SME Lending in Australia – The Full Picture
The downward trend in Australian small business lending isn’t necessarily attributable to COVID-19, it’s actually part of a wider pattern which has emerged in recent years. Data from the Organisation for Economic Cooperation and Development (OECD) shows us this clear trend:
|New business lending, SMEs ($ billion)||77.5||79.9||69.6||82.5||81.6||73.7||79.1||85.4||91.2||86.7||79.7||76.7|
After reaching a peak in 2015, new small business lending saw three years of continuous decline, resulting in the lowest level of new SME funding since 2012. Even 2010 and 2011, the years following the 2009 financial crisis, saw higher levels of new lending to SMEs. In fact, since this data was reported from 2007, the only years which saw a lower volume loaned to small businesses other than 2018, were 2009 and 2012.
Challenger banks and Fintech online business lenders have been more keen to highlight the issue of SME access to finance than Australian banks have. Previous research from Judo Bank and East & Partners highlighted the SME funding gap (a measure of the value of unsuccessful loan applications in Australia) to have increased from $83.2 billion in 2018 to $91.5 billion in 2019. Judo Bank (previously known as Judo Capital), has become one of Australia’s most successful Fintechs and was established for the very purpose of improving SME access to capital – quite clearly there is a demand.
Crucially, following the pandemic, small business perception of access to finance is low and the levels to which SMEs believe access to finance is difficult vs access to finance is easy hasn’t shifted this much since the financial crisis.
Given the increased support made available by the Australian government, a fairly significant issue appears to be SMEs perceived access to finance. With over 90 percent of SME loans being secured and about half of small business loans being residentially secured², it’s likely that SMEs who aren’t able to provide security in the lending process, will have major doubts as to whether they can attain finance.
As a result of the pandemic, the availability of credit to businesses has tightened a little further as well. Banks have indicated that this largely falls down to the application of existing lending standards (which are higher for SMEs) being more difficult to apply when the economy is stalling and great uncertainty remains. Smaller businesses have a relatively higher risk profile than personal and large business customers, so have thus felt the impact of the pandemic on new credit applications the most. Modelling by the RBA and APRA shows that small business customers are around three times as likely to default on a loan when compared with large business customers.
The Sensis Business Index, a survey based on over 1000 SME responses, is one of Australia’s Leading Small and Medium Business Confidence Surveys. Data from the Sensis survey, though on a smaller scale, appears to match that collected by the ABS and RBA, further supporting the belief within SMEs that finance is too difficult to access. In the most recent survey, 37% of SMBs believed it was more difficult to get finance since the start of COVID-19, up from 32% who believed it was getting harder in March 2020. The survey also showed us that more than one in four businesses (26%) were knocked back in trying to get finance – and the figure was worse in the bush with 37% of those applying in regional towns being knocked back compared to 25% in Australia’s cities.
SME Lending in the USA
Unlike Australia, the US has seen an increase in the value of small business loans outstanding, both over recent years and throughout the COVID-19 pandemic. Interestingly, the increase in small business loans over recent years was largely attributable to big banks increasing their small business loan commitments, whilst growth in SME loans throughout the pandemic was bolstered by smaller lenders. The value of outstanding small business loans for loans less than $1 million (small business loans) increased by 39% in just 6 months from the end of 2019 to the end of June 2020.
US SME Lending Pre-Pandemic
Until 2019, it was almost solely lending institutions who had >$10 billion worth of assets who were driving the increase in SME finance.
The total value of all small business loans outstanding increased by 4.1% from 2017 to 2019. This increase came despite a universal fall in the value of loans outstanding by lenders who hold total assets <$10 billion. This is somewhat surprising, as the Small Business Lending Fund, which was introduced in 2010 as part of the Small Business Jobs Act, was specifically designed to encourage lending to small businesses by providing cheaper capital to lenders with under $10 billion in assets. The fund runs in a similar nature to the Term Funding Facility launched in Australia in 2019 – designed to lower the cost of capital for lenders if they increase the loans issued to SME customers. This suggests there are other factors which have driven the increase in small business loans in the US.
A look at the most recent Small Business Credit Survey, conducted by the reserve banks of 12 major US states, gives an idea behind the reasons small business lending has increased over recent years. The variety of lending solutions, the variety of lenders, and most importantly the understanding of alternative financing options by US SMEs, appears to be higher than it is in Australia.
US SMEs are aware of the higher costs involved with loans from online lenders but are also aware they have the highest approval rate of any small business lender³. 32% of online lender applicants specifically opt for an online loan because they’ve been denied by others.
US SME Lending Post-Pandemic
The most significant policy implemented in the US to bolster SME lending as a result of the coronavirus pandemic was the Paycheck Protection Program (PPP). It had a huge, immediate effect, which saw the value of total business loans outstanding by depository lenders increasing by 14.8% ($507.5 billion USD) from December 31, 2019 to June 30, 2020. The program, which is similar in concept to the JobKeeper payment (it was designed to incentivize SMEs to retain staff) has two crucial differences.
Firstly, the JobKeeper payment is organised centrally by the ATO and works as a business payment provided by the government, providing an SME meets the required decline in turnover criteria. PPP, however, operates as a business loan scheme and runs in tandem from the US government and commercial loan providers. Loans can be fully forgiven, providing the proceeds are used on eligible expenses.
Secondly, the JobKeeper payment is strictly managed per individual employee and requires businesses to apply for support that contributes towards each salary – resulting in either a tier 1 or tier 2 rate of payment per employee. The PPP operates differently again and simply asks that at least 60 percent of the loan proceeds are spent on payroll costs in order to be eligible for loan forgiveness. Providing significantly more flexibility for SME borrowers to access finance for additional business expenses, such as commercial rent payments. For businesses who receive full loan forgiveness the loan thus ends up working just like a grant and will be removed from the balance sheet of the lenders.
PPP has not only boosted the total amount of finance US SMEs have been able to receive throughout the coronavirus pandemic, it has also provided a greater diversification of lenders who have been able to support SMEs in this time. Depository lenders with between $1 billion and $10 billion in total assets have significantly overperformed by distributing 62% more funding than expected prior to PPP. Meaning they’ve increased their market share for small business loans to 16%.
All lenders with assets under $50 billion benefited from PPP and were able to enjoy greater market share of small business loans. The fact the SBA has been able to roll out PPP with the help of all SBA 7(a) approved lenders means more fintechs and alternative lenders have been involved and able to use their expertise in issuing fast small business loans. Through the end of June 2020, nearly 4.8 million PPP loans had been approved for over $519 billion.
Small Business Lending in Australia – What Can We Learn from the US?
The Small Business Lending Fund in the US had little impact in improving the volume of small business loans issued by smaller lenders. The Term Funding Facility and the SME loan guarantee in Australia appears to be encountering similar difficulties. This was identified as a concern from Fintech lenders early on in Australia’s response to the pandemic. In an interview with the Sydney Morning Herald, Guy Callaghan, chief executive of Banjo, commented, “It’s been a bit of a Catch 22 the major banks have got access to the lower cost funding but they are more risk averse so they don’t actually go out to lend in the same way, they can’t get access to the data and they can’t get comfortable unless you have property,” he said “Until we can access that cheaper funding I think there is a fiction out in the market on how popular the scheme is going to be.”
The Paycheck Protection Program has had a significant impact on the small business loan market in the USA. The unique public/private sector partnership to roll out the PPP loan scheme has drastically increased the market share of the small business loan market for smaller banks and alternative lenders. Serving to raise awareness to SMEs of all the finance options available to them. The JobKeeper Payment in Australia has perhaps been of sufficient purpose to the cash flow difficulties experienced by Australian SMEs but it has arguably missed out on an opportunity to re-shape the finance market for small businesses.
The Australian Government has a comprehensive SME agenda which includes various business grants, tax benefits and business incentives. Arguably, however, its largest area for improvement is improving accessibility to SME finance. Innovative finance solutions, such as crowd-sourced equity funding, are increasing in Australia but awareness remains low. The RBA and APRA have recently expanded the data metrics Australia has on SME lending, though more can be done to improve visibility on the source of business loans. A regular small business credit survey in Australia, like that compiled by the US Fed, would help to further understand the challenges SMEs face when seeking finance. Results can then be used to better educate SMEs on the finance options available to them, particularly around lending solutions with a higher approval rate, such as a Merchant Cash Advance and Equipment Financing.