With business owners missing out on finance from the big banks, Kate Carnell has offered advice on alternative lending options.
Migrants own and run one-third of Australia’s two million small businesses. But some are being forced to shut up shop due to lack of finance, industry experts say.
Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), told SBS's Small Business Secrets this week: “A new migrant or refugee whose English is not their first language, and who may not have equity in bricks and mortar, faces a tough gig to convince a bank to lend, and we simply have to change that.”
“Small businesses need funding to grow and prosper. Yet major banks are rejecting more than one-third of their loan applications,” she said.
“If we really want to get the economy moving, and we really want to address unemployment, we really need to get those small businesses employing.”
Research has found an $83 billion funding gap in small and medium business lending, due in part to tighter lending restrictions since the banking royal commission.
And Ms Carnell says one-third of all small business loan applications are rejected by the major banks.
“Many owner-operators don’t apply for loans unless they have significant equity in real estate, fearing their application will fail,” she said.
It is especially hard for younger entrepreneurs, many of whom who don’t own property.
Barriers for migrants
Cloud accounting adviser Lielette Calleja has 25 years’ experience in bookkeeping and accounting.
“Most small business owners probably don’t know what options are available,” she said.
With many migrant business owners in her client list, Ms Calleja is aware of the barriers they face.
“It’s easy to get a credit card and a bank account, but when it comes to lending, new arrivals don’t have any property, or they may not even be Australian residents for tax purposes.”
“It is most definitely harder to get credit now, even if you have a good set of accounts there are still hoops to go thru and no guarantee especially if you’re self-employed.”
Ms Calleja said lack of access to funding is having a major impact on the retail sector.
“I’ve never seen so many businesses close for lack of funding. When you walk through a local shopping centre and see for lease signs, it breaks my heart.”
“It’s very sad to see a lot of cafes and restaurants closing down, and they are probably all migrant people coming out here to live the Australian dream - and that hasn’t happened.”
Alternatives to banks
Traditionally, more than 80 per cent of small businesses have relied on banks for credit. But the non-bank lending sector is also growing rapidly to fill an estimated $83 billion funding shortfall.
Chartered accountant Harry Grewal started up a transport business two years ago. The 36-year-old took out loans to the value of $1.3 million from non-bank lender Scottish Pacific Business Finance.
He now runs 11 vehicles from a base in Sydney’s west.
“As a start-up, I knew the banks wouldn’t lend without a trade history,” he said.
Although the business has grown steadily for two years, Mr Grewal isn’t switching to bank finance.
“We pay a slightly higher interest rate but it’s working well.”
Small and medium enterprise challenger bank Judo is also helping Australian businesses get finance.
Judo Bank was granted a full license earlier in the year and has just made history raising $400 million in the biggest individual funding round for an Australian start-up.
It expects to lend more than one billion dollars, mainly to small and medium businesses, by the end of 2019.
Its co-founder Joseph Healy said: “there is a market failure and major banks are no longer meeting the needs of the small business economy.”
“In the small to mid-size business community, people need a bank to see what they are trying to do. They are the butcher, baker and candlestick maker and they do want an expert to talk with about how they might grow the business and succession planning," he said.
"They [major banks] don’t ask questions about the business, it’s really 'how much is your house worth?' and 'I’ll lend you 60 per cent of that'."
At the end of July, Ombudsman Ms Carnell released resources designed to tackle the issue of access to funding in partnership with Scottish Pacific Business Finance.
The Business Funding Guide aims to help small to medium enterprise experts advise on financial decisions, while the FitSME Essential Guide to Business Funding gives small business operators information about becoming ‘finance fit’.
“The guides also help people deal with other issues like the credit card trap, where owner-operators have used their business credit card and they’ve maxed it out and are paying huge amounts of interest,” Ms Carnell said.
The guides outline scenarios faced by small business owners.
“There’s a funding decision flow chart and it starts out with the question ‘are you looking to borrow or secure an investment’ and it makes it pretty clear how you go thru the process,” Ms Carnell said.
Peter Langham founded Scottish Pacific 30 years ago. The non-bank institution expects to lend $1.3 billion this year, mainly to small or medium enterprises.
“Small business people are time-poor, and they put their heart and soul into their business. So for them to know all the alternatives out there in the market is very, very difficult,” he said.
Ms Carnell said small businesses are still able to get support from traditional banks, with many now fast-tracking business loans for existing customers.