“The inquiry follows our Barriers to Investment study last year, which identified a funding gap where SMEs do not have access to the finance they need to start or grow their businesses,” Carnell said.
“The UK, Canada and the US – jurisdictions similar to Australia – have addressed this market failure, which is worldwide, with successful initiatives that have increased access to affordable growth capital to SMEs.
“The Productivity Commission’s draft report into competition in the Australian financial system and the Reserve Bank of Australia have also identified the funding gap for SMEs.”
Carnell said that in Australia, lenders consider SME’s high risk and offer capital with restrictive terms and conditions, at high interest rates and demand bricks and mortar as security – which is usually the family home.
“Unfortunately, the unintended consequences of the financial services royal commission for SMEs might be an increase in banking regulation, making it even more difficult for them to access affordable growth capital,”s
“The fintech lending space is growing, providing low value, short term loans at interest rates significantly higher than banks which may assist immediate cash flow, but does not support long term growth.
“I regularly remind people that SMEs are the engine room of the economy, but the engine won’t work without petrol, which is seed capital and growth finance.
“We have made eight recommendations outlining initiatives to increase the supply of capital, and inform and prepare SMEs to be finance ready to address the market failure.
“On the supply side, we recommend establishing a Business Growth Fund based on the British model, to focus on long term funding solutions for SMEs that have the capability to grow.
“Another is an Australian Government Guarantee Scheme. Under the scheme member banks can apply for a government guarantee to partially support a loan to SMEs with a strong business case but insufficient real estate or business assets.
“On the demand side, our recommendations include initiatives to help SMEs prepare their business to seek capital, and raise their awareness of alternative sources of finance outside traditional banking.”
Further information about the inquiry and the Affordable Capital for SME Growth report is available on the ASBFEO website.