Small Business Ombudsman backs public bank for SMEs

| November 7, 2017

The Australian Small Business and Family Enterprise Ombudsman has called for an Australian version of the British Business Bank to help smaller firms scale up their operations.

Speaking at the Franchise Accountants Network conference in Sydney, Ombudsman Kate Carnell argued that poor access to finance remains a major challenge for Australian small-medium enterprises. Echoing concerns expressed at GAP’s recent summit, Ms Carnell noted that banks are happy to lend to small businesses if they have security such as property or cash but the lending constraints and prudential requirements put in place after the Global Financial Crisis have reduced their willingness to lend to mid-sized firms.

She has asked the Productivity Commission to explore the unintended consequences of prudential risk weighting standards and capital requirements on lending to small businesses and said the option of a Government-backed approach to small business lending should be considered.

“Other countries have identified a similar problem and come up with solutions,” she explained. “The British Business Bank can provide a government-backed 75% guarantee against the outstanding facility balance, potentially converting a ‘no’ credit decision from a lender to a ‘yes’. The British Business Bank can also help small finance providers to tap institutional investors’ funds and Ms Carnell warned that “without a creative approach to small business lending in Australia we risk stifling growth, investment and employment.”

The British Business Bank has helped almost 60,000 smaller UK firms, turning over less than £25 million, secure finance from commercial lenders. As well as supporting start ups, it helps established mid-sized firms looking to expand or stay ahead of their competition by guaranteeing a portion of their loans from commercial lenders and offering a range of advice services. 

Its ‘scale up’ packages allow mid-sized firms hire more staff, take on new premises and invest in capital equipment.  The bank does not invest directly in particular companies itself, but works with around 80 commercial partners and equity funds, helping them to release the general working capital or debt capital smaller firms are looking for.

Owned by the UK Department for Business, Innovation and Skills, its creation was announced by Vince Cable, then Secretary of State for Business, in 2012.  It was originally given £1 billion of government funding and amalgamated a number of government financial schemes and advice services to offer SMEs a ‘one stop shop’.  An additional £250 million was pledged by then Deputy Prime Minister Nick Clegg in December 2013, and it launched in late 2014.

The bank took on the financial schemes previously controlled by Capital for Enterprise Ltd, including Enterprise Capital Funds, the Enterprise Finance Guarantee, Business Angel Co-investment Funds and the Small Firms Loan Guarantee. It also ran an assessment process to select Bizfitech, Funding Xchange and Funding Options as the designated finance platforms for the UK’s bank referral scheme.

The Conservative’s manifesto for the 2017 election, which saw Teresa May returned to power by a razor thin margin, promised the Bank would take over from the European Investment Bank after Brexit, receiving the UK funds hitherto earmarked for the European Investment Fund.

Although federal and state governments offer a range of assistance to the small business sector, the difficulties encountered by smaller firms seeking finance from the big 4 banks have not been addressed.  Ms Carnell’s call for an Australian version of this successful British solution may well garner wider support within the mid-sized business community.

Ms Carnell has also welcomed Federal moves to reduce regulatory barriers to entry for new entrants to the banking system.  The Treasury is consulting on proposed changes to the Banking Act,which would allow use of the word “bank” by authorised deposit-taking institutions and Ms Carnell believes this would improve access to finance for small business.

“The power and control of the established banks remains a barrier for small businesses seeking capital to start or expand their operations,” Ms Carnell said in a statement, “Another barrier is a general requirement by the major banks for bricks-and-mortar security.  Unless a small business is able to meet this requirement, often by using a business owner’s home as security, they have few options to obtain finance.”

Removing restrictions on use of the term “bank” should allow more providers to compete with established institutions and therefore make it easier for small business operators to borrow funds.  However Ms Carnell notes that the Australian Prudential Regulatory Authority’s guidelines still require “banks” to hold at least $50 million in Tier 1 capital and said that APRA will have to review its guidelines for minimum capital requirements if new entrants are to have a chance against the major institutions.

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