Encouraging mid-sized investment to generate growth and jobs

The Australian Small Business and Family Enterprise Ombudsman has released a new study into factors affecting small to medium enterprise investment.

Speaking at the Institute of Public Accountants national conference on the Gold Coast, Ombudsman Kate Carnell said extensive consultations with SMEs around the country had highlighted the issues of access to capital, red tape and energy prices. Removing barriers to investment would give smaller Australian firms the confidence they need to grow and boost jobs.

The Bank of Mum and Dad
Despite recent claims by bank executives that lending to small firms is booming, Ms Carnell said this wasn’t the case for borrowers who don’t have equity in property. “Traditional bank loans are backed by real property mortgages and although alternatives are emerging, they are not currently mature and affordable,” she said. “Young aspiring small business operators are particularly disadvantaged and increasingly rely on their parents to provide seed finance.”

Ms Carnell said this meant the “Bank of Mum and Dad” was often called on to help young entrepreneurs. “This offers convenience and flexibility, but it puts people’s retirement savings at risk,” she said. “It also raises social equity issues in that the children of affluent parents have greater opportunities to buy and grow businesses.” Ms Carnell repeated her call for a government-backed guarantee scheme, similar to the British Business Bank.

The report also criticises Australia’s huge superannuation schemes for focussing on short term foreign investments rather than investing for the long term in Australia’s smaller firms.

Progress in Parramatta
The Ombudsman’s study also takes aim at red tape, saying past reduction efforts have largely been “window dressing”. Ms Carnell said a successful pilot in Parramatta to make compliance requirements seamless should be extended to other areas.

“There were more than 50 pieces of regulation which applied to setting up a hospitality business in Parramatta and the regulation meant it took up to 18 months to commence trading,” she said. “Regulation wasn’t removed, but was instead sped up and made invisible. Information provided once was used to automatically complete forms in other areas of bureaucracy. “This is a smart way of using systems and technology to relieve regulatory burdens on business.”

The report was based on ministerial consultations and a number of roundtables with small and mid-sized businesses held earlier this year. The issues raised by businesses included:

Access to capital
Businesses reported their problems in accessing capital and securing fair treatment following entry into loans. SMEs are seen as small but complex clients by the banks, making the sector unattractive to less efficient traditional lenders given the high cost to serve each individual client. 

Traditional lenders view SME lending as risky, particularly if they lack fixed assets to secure a loan. Banks see SMEs as more sensitive to macro-economic trends and have stricter regulation and prudential capital requirements for loans to SMEs in the wake of the GFC.

Competition
Market disruption and the need for a ‘level playing field’ were also highlighted by smaller firms. Access to local produce for business inputs is also an increasing issue for small Australian firms in a more globalised economy. Various issues were raised under the banner of unfair competition, including issues with franchising, retail tenancies and insurance and the operation of the Unfair Contracts Terms legislation.

Payment terms and times
Businesses reported difficulty in achieving fair payment terms and getting paid on time. The experience of businesses was that payment terms and times were steadily worsening.

Government arrangements
Cross border issues, such as different regulations, and lack of good and consistent regulation, access to procurement, and government support around regulatory compliance, including a sharp focus on compliance costs, were expressed to be significant impediments. Their problems in accessing contracts to supply governments with goods and services were often followed by issues of payment along supply chains under these contracts.

Taxation
Small firms called for larger companies to pay their fair share of tax and complained about the tax compliance burden. Payroll tax was viewed as a drain on business and employment, punishing businesses that sought to expand and employ beyond certain limits. The $20,000 instant asset write-off was viewed by many businesses to be of particular importance to their ability to continue investing in their business.

Infrastructure
A range of infrastructure issues were raised, including energy costs and reliability. Indeed business operators increasingly view personal generators as an essential part of running a business. Telecommunications infrastructure, the need for a good rail network and availability of cost effective coastal shipping were also raised, with coastal shipping the key issue for Tasmania.

Employment
Employment issues including access to apprentices and skilled staff, high penalty rates and legislative impediments to hiring and firing employees. SMEs often avoid taking on additional permanent staff as it is too difficult to recruit and then to remove staff for business needs.

Those that do employ are likely to seek to keep staff numbers to a bare minimum to avoid as far as possible the disincentives created by regulation. In particular, difficulties in removing staff for underperformance are commonly cited for restricting staffing levels with “go away money” often offered to avoid costs of $20,000 to fight a case within the regulatory system. Larger firms are able to negotiate lower penalty rates with unions or accept more flexible work practices.

Business costs
Excessive merchant fees on electronic transactions were criticised. The cost of postal services was also raised as an issue to businesses seeking to expand nationally and internationally, given lower postal costs abroad.

Regional and local issues
The regional nature of the roundtables meant that firms raised a host of local issues pertinent to themselves. These ranged from rental costs and building vacancy levels to extended periods for road and other maintenance, and major infrastructure works disrupting business for prolonged periods. Businesses also reported restrictions on access to markets and training and mentoring services and cost differentials between regions.

Red tape
The issue of red tape crosses all regulation but is commonly raised in respect of planning and zoning regulation, including business size and extended time frames, as well as trading hours.

Larger businesses can afford to employ compliance specialists or outsource to external specialists to deal with regulatory requirements and pass on regulatory costs to other businesses and customers. However owners and managers in SMEs must often shoulder the burden themselves and tend to “narrowcast” their business as a result. By consciously limiting their growth, small business can minimise risk and regulatory costs, to the detriment of the economy as a whole.

The way forward
The ASBFEO raises a number of points for further examination and encourages a shift in regulation to encourage more expansive bank lending and help the superannuation system reap strong medium to long term returns through more diversified investment portfolios.

Such steps might be supported by targeted approaches such as advice on creating model bank loan applications and the de-risking of loans though bodies based on the Clean Energy Finance Corporation. It also calls for reforms in the areas of workplace relations and energy costs and the wider roll-out of successful regional and state business support schemes.