Is Australia Doing Enough to Improve Access to Capital for SMEs? A comparison with the United States.
By: Russel Gous, EX- Barclay’s / WorldFirst
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 that lockdowns and economic restrictions have had on the economic outlook over recent years and, thus, the knock-on effect to business lending practices. With that in mind, we look at the state of small business lending both pre and post the coronavirus outbreak.
Due to the lag in data release by the Reserve Bank of Australia and Australian Bureau for Statistics, we simply present the most up-to-date data at the time of publication (usually a few months prior). 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 understand the impact increased interest rates, higher inflation and the economic slowdown has had on SME accessibility to finance.
The View of Aussie Banks
Following the publication of its 2022 SME lending report, Anna Bligh, CEO of the Australian Banking Association (ABA), acknowledged that SME lending remained largely flat over recent years. “While the growth of total small business lending remains flat, data received from ABA member banks shows that the average value of loans made to small and medium businesses has been increasing,” Ms Bligh said.
There are two ways to interpret this announcement – on the plus side, it is indeed positive that SMEs who do access capital have been able to borrow more. On the contrary, this also means less SMEs have been able to access any finance at all.
Analysing the data published by the Australian Bureau for Statistics (ABS) and reported on by the ABA, we can see there was in fact a decline in the value of new small business loans issued in June 2022 ($4.79B) vs June 2021 ($4.84B). Looking at the data points, we can also see that lending was stronger in the second half of 2021 than it had been in 2022.
Aussie banks seem to believe the issue is less about the accessibility of capital but more down to the low demand for finance from SMEs. The ABA 2022 SME report also states “the appetite for finance remains subdued amongst small businesses…In the six months to August 2022, no more than 17 percent of SMEs reported anticipating requiring additional finance in the following three months. ” However, the research conducted by the ABA is contradictory to that conducted by online lenders Judo Bank and Banjo. It also goes against the general trend identified by the Sensis Business Index (more on all of this later).
One sector which has seen tremendous growth in borrowing is agriculture. In a November 2022 announcement, Anna Bligh said “Bank lending to Australian agribusiness has increased by almost a third during the past year to $104.7 billion as of September this year. The sector is buoyed by strong global commodity prices, however, the incredible resilience of those in rural and regional areas has contributed to the sector bouncing back from the drought years.” There’s a variety of Agricultural finance options that are open to agribusiness and, for this sector at least, it’s a good time to strike whilst the iron is hot. What we can’t see, however, is how much of this funding went specifically to small agricultural businesses.
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 $40 billion SME guarantee scheme.
SME Lending in Australia – The Full Picture
The downward trend in Australian small business lending isn’t necessarily only attributable to the economically disastrous lockdowns and heavy handed response to the COVID-19 pandemic. It’s actually part of a wider pattern which has emerged in recent years. Data from the RBA and presented by the Organisation for Economic Cooperation and Development (OECD) shows a trend over the last decade:
|New business lending, SMEs ($ 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||85.2||80.0|
After reaching a peak in 2015, new small business lending saw three years of continuous decline, with 2018 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. 2019 saw a strong recovery in the value of small business loans issued, and at $85.2 billion this was getting closer to the levels seen between 2014 – 2016. Unfortunately, lockdowns and the resulting economic restrictions then took their toll in 2020 and new business lending was back down to $80 billion. ABS data has already shown us that SME lending remained largely flat from 2020 – 2022.
Be aware that the Australian Bureau of Statistics and Reserve Bank of Australia define small business in different ways, thus explaining the differences in data. The RBA determines a small business as any company with a turnover under $50 million, whilst the ABS determines a small business as any company with under 20 employees. By understanding the methodology the ABS uses to define a small business, we can in essence deduct that small SMEs have seen a greater reduction in loan volumes than large SMEs.
Challenger banks and fintech online business lenders have been more keen to highlight the issue of SME access to finance than Australian banks have.
The 2023 SME Compass Report by Banjo found 1 in 2 SMEs face hurdles when trying to get funding. In the study, the most popular reasons provided by SMEs for finding it difficult to access finance included:
- Time taken to obtain decision (19%)
- Requirements of the bank lender too strict (17%)
- Difficulty obtaining a suitable interest rate (17%)
- Required to provide property / personal asset (15%)
In terms of SME demand for finance, research by Banjo found 3 in 10 SMEs intend to use business loans in the year ahead, whilst nearly 3 in 4 SMEs plan to use some form of secured financing and 1 in 2 SMEs plan to use unsecured financing in 2023.
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 and $94.3 billion in 2020. Unsuccessful loan applications point to unmet demand.
The Judo Bank report provides a more balanced outlook than that found in the research conducted by the ABA and Banjo Business Loans. The Judo Bank report suggests that whilst there are more businesses who didn’t take on any funding in the previous twelve months, over 40% did. The ABA’s findings of a 17% peak of SME demand for finance asks if businesses “plan to take on finance in the next three months”. In contrast, Judo Bank’s report asks respondents “if they have received finance in the last twelve months” – a more accurate representation as it isn’t based on expectation but whether or not they actually took finance. Given that the ABA, Banjo and Judo Bank post annual reports we also feel that Banjo and Judo Bank’s approach to ask respondents about a twelve month period is more appropriate.
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 continues to remain 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.
Government Acknowledges SME Access to Finance is an Issue
The Australian Government commissioned its own research into the matter with a paper released in September 2021 titled “Small business access to finance: The evolving lending market”. This included data from the Sensis Business Index which surveys a (non-representative) sample of about 1000 SMEs.
The survey findings suggest that the perception from SMEs in their ability to access finance between November 2010 and November 2020 was mostly a net negative, i.e. more SMEs deemed access to finance to be relatively difficult than relatively easy. 2015 – 2018 were the only years where more respondents deemed access to finance to be relatively easy (no doubt a perception from the increase in small business finance from 2014 – 2016). From 2018 onwards, perception then skewed into more respondents believing finance was relatively difficult to access. This trend started even prior to the COVID outbreak and likely a result from the declining volume of business loans issued in 2017 and 2018.
In the most recent 2020 Sensis Business Index released in November of the same year, 25% of SMBs believed it was more difficult to get finance than it was two months earlier. Slightly down on the 28% of respondents who felt finance was more difficult to access in October 2020.
The survey also showed us that of those who applied for business finance, 61% were successful in October and 71% in November. Meaning roughly 3 in 10 businesses were rejected.
Government Initiatives – SME Lending
The banking industry seems keen to place the responsibility for lower lending volumes on SME demand but, as detailed, research conducted elsewhere points to the fact that this is certainly not the only factor involved (if indeed it is a large factor at all). So what about the government? What role have they played? And have their measures to boost lending uptake of sufficient value to help SMEs through a hugely challenging economic period?
Judo Bank believe so and point instead to the banks for being mostly to blame. In the announcement of their latest SME Banking Insights report, the firm abruptly stated “Government support was readily available and abundant in response to the COVID crisis through a range of targeted measures such as improving Responsible Lending laws and greater access to low-cost funding for ADIs and non-bank lenders. Yet, despite the admirable efforts by the government, businesses that form the backbone of Australia’s economy were left out in the cold yet again by the major banks during the pandemic, with a retraction in SME lending over the period.”
The low-cost funding solution that Judo Bank speaks of for ADIs, or Authorised Deposit-taking Institutions (i.e. banks), is a reference to the RBA’s Term Funding Facility. A major response mechanism by the RBA in an attempt to boost business lending during the COVID outbreak.
With questions raised, the RBA conducted its own research into the success of the Term Funding Facility, publishing a discussion paper in December 2022. The conclusion? “Using bank-level data and a difference-in-differences approach, we find no statistically significant evidence that the TFF increased credit supply to businesses.”
Announced in March 2020, the TFF initially gave banks access to three-year funding at a cost of 0.25%. In line with the cash rate target, this was then lowered to 0.1% in November 2020. Basically, the TFF was much cheaper than 3-year wholesale funding for major banks and even more attractive to smaller banks, who typically have lower credit ratings and a higher cost of funding. Through the TFF, banks could borrow up to 3% of their total credit outstanding, with one dollar of additional allowance for every net dollar increase of lending to large businesses, and five dollars of additional allowance for every dollar increase in lending to SMEs.
The banks that had access to additional allowances generated $26 billion in new lending to large businesses and $9 billion to SMEs. Analysis in the discussion paper shows that, despite the additional incentive to lend to SMEs, this was the segment which saw least benefit (in terms of additional finance at least). And though the data suggests there was little benefit in terms of loan growth, the TFF did help to reduce funding costs for SMEs. Evidence suggests some SMEs took the opportunity to refinance existing business loans at a reduced rate.
Now this does have to be weighed up against a generally gloomy outlook and the fact SMEs operate in industries that were most affected by lockdowns and commercial trading restrictions. A number of small businesses opted for other government support schemes, such as JobKeeper Payment, and were reluctant to take on additional debt.
Given the increased support made available by the Australian government, it seems reduced SME demand and tight bank lending practices were also factors. 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 secured, it’s likely that SMEs who aren’t able to provide security in the lending process, have major doubts as to whether they can attain finance.
Since 2020, the availability of credit to businesses has certainly been restricted 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 COVID outbreak and economic slowdown on new credit approval 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.
Whilst the lending initiatives launched by the government in response to the pandemic largely missed the target, it should be acknowledged there are a number of government schemes which can help SMEs improve cash flow and grow their business. Firstly, Australia has one of the most extensive small business grant programmes of any western country. In addition, there are various tax-saving schemes that may be of benefit to SMEs too.
Tax benefits include things like the instant asset write off scheme (possible when applying for asset finance) and electric car tax incentives (possible through things like a novated lease). Electric vehicles and plug-in hybrid electric vehicles are now exempt from fringe benefits tax under a novated vehicle lease.
Future SME Concerns
Moving forward, the government faces a diverse set of new challenges to boost the uptake of SME finance. Research commissioned by us at Small Business Loans Australia seeked to understand the biggest concerns of SME business directors in 2023.
According to our survey, fast-rising inflation was the no.1 concern of SME directors. High inflation is of course strongly linked to fast-rising interest rates and reduced consumer spending. Central banks raise interest rates to encourage saving and reduce spending. 11% of respondents were also concerned about their existing loan obligations.
76% of respondents felt fast-growing interest rates and inflation will impact their cash flow. 3 in 10 (30%) said it will be more challenging to collect customer payments, while just over a quarter (26%) said sales will be more difficult to attract. A fifth (20%) revealed both factors will impact cash flow.
When asked if they were likely to seek finance to resolve their cash flow difficulties, these were the results:
Micro-businesses (firms with 10 or under employees) were the least likely to apply for a business loan to solve their cash flow difficulties. Just 32% felt they would go down this route. Whereas 66% of larger SMEs (51-200 employees) and 75% of small SMEs (11 – 50 employees) would consider applying for finance. What the analysis does not uncover is why micro businesses are less likely to apply for finance – a significant driving factor of this could be their perceived access to finance. Aware that their chances of approval are less and interest rates likely higher.
The Australian government is yet to make a move to respond to these factors and seek to improve the uptake of SME finance. As things stand, we’re stuck in the environment of traditional lending standards being even more rigorously applied during a period of economic uncertainty.
SME Lending in the USA
Unlike Australia, the US saw an increase in the value of small business loans outstanding, both in the years prior to the COVID outbreak and throughout the uncertain years during the response. 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– 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 Small Business Credit Survey from 2020, conducted by the reserve banks of 12 major US states, gives an idea behind the reasons small business lending increased in the years prior to 2020. It seems 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 lender. 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 outbreak was the Paycheck Protection Program (PPP) and the Paycheck Protection Program Liquidity Facility (PPPLF). The PPP was the loan incentivisation program offered to SMEs and the PPPLF was the facility that provided low-cost funds to PPP lenders where the amount and maturity of the funds from the Federal Reserve exactly matched the amount and maturity of the PPP loans made by the PPP lender.
Looking at the numbers, the scheme 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 somewhat similar in concept to the JobKeeper payment (it was designed to incentivize SMEs to retain staff) has three 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.
Thirdly, banks were directly awarded with cheap funding through the PPPLF for loans they issued through PPP. This involvement of the private sector in a government initiative meant there was greater encouragement and direct benefit for banks to lend under the scheme. Australia offered the JobKeeper payment through the treasury and the Term Funding Facility was in no way linked.
PPP has not only boosted the total amount of finance US SMEs have been able to receive, 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%.
Research from the Federal Reserve concluded that the “PPPLF had a statistically and economically significant impact on PPP… We find that use of the facility was particularly important in boosting the PPP lending of smaller community banks, those with assets of $600 million or less. For large community banks, our results suggest that it was the availability of backstop funding provided by the facility that had a greater effect on boosting their lending.”
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.
Another successful scheme launched by the Federal Reserve was the ‘Main Street Lending Program’, which saw the Fed take a 95% participation in eligible loans from lenders and share the credit risk. Though it has to be said, this was more targeted to mid-size corporates with over 500 employees. Nevertheless, Australian policymakers can take guidance from Federal Reserve research papers, such as ‘Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending Program’. A report which concluded “Our key result is that bank participation in the MSLP is strongly and robustly associated with relatively less tightening of C&I lending standards and terms… our study highlights the role of central bank interventions in mitigating financial institutions’ risk aversion in the face of uncertainty shocks”.
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. The annual report compiled by the Australian Banking Association is arguably biassed and delivered in a way to make large banks appear more favourable.
Results from an independent analysis could 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.