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Edition 404 -Inflexible Banking

Australia’s four big banks really need to change their ways around how they lend to small and family business. If they don’t, a large disruptor is going to enter the finance space, quickly erode their small business market and in the process, put the business models of each of them at significant risk. Maybe that’s the rocket they need!

In my opinion, Australia as a nation simply can’t grow unless the banks move from the old ways of seeking real estate security for most business lending options. It’s antiquated. It’s inflexible and frankly, it’s an insult to small business owners that have spent years building profits and equity in their business.

A recent experience assisting a client to source an alternate lending option was an exercise in frustration. The business has significant profits over the past four years and their EBITDA (the bank’s adjusted assessment of profit) stands at 25% – simply phenomenal. I’m hard pressed to find any public companies that are showing that bottom line.

The bank won’t take security over the goodwill of this business simply because, in their opinion, if the borrower goes bad, they can’t flog anything off to repay the debt. The fact the business would easily sell on the market tomorrow for in excess of the level of funding being sought means nothing apparently.

As most small business owners know, when you go to borrow money for your business, banks want, as security:

  1. Your business.
  2. Your business assets.
  3. Your home.
  4. Any personal assets of value.

In the US and other countries, private equity and venture capital bolster the lending market for small and medium businesses. In other countries, its Governments that step in and lend.

Here in Australia, 60% of economic growth is generated by small and family business. 65% of employment nationwide is inside of businesses with less than 20 staff. Yet the future strength of the Australian economy and our ability to compete on the world stage is detrimentally impacted by a business lending regime that has its origins in the days of the old, musty, leather bound ledgers that once occupied bank branches across the country.

Whilst there are a couple of smaller disruptors in the market right now, perhaps its time for a larger player to enter the small business lending market. For goodness sake, with more than $1 trillion in retirement savings in Australia, you’d think a couple of the larger superannuation funds would see the opportunity to not only create a new business opportunity, but completely outfox the big banks at their own game.

It seems to me that, at the end of the day, the problem is that Australia is dominated by the four major banks and their subsidiaries. Maybe they’re too comfortable because for the last 40 years, it’s been pretty much them and no one else.

Just like Uber blew up the taxi industry, Netflix the mainstream television networks and Spotify the world of commercial radio, the time is coming when disruption is coming to small business lending for the big banks. And, it can’t come soon enough!

This Week’s Tip

“If the banks control lending to small business, doesn’t that mean that, essentially,
they have more sway in the setting of economic policy than the Federal Government itself?”