The easiest way to understand the funding landscape and by extension, lending trends in Australia is to split the market into four sectors:
- Government and Large Corporate businesses (BHP, Telstra, etc.);
- The Mid-Market (Companies with annual revenue between $10 million and $250 million);
- Small and Medium Businesses (SMEs); and
Each market sector is borrowing funds for very different reasons and has very different facilities made available to them from different funding sources. Some examples of sources of funding in Australia are as follows:
- Banks (the so-called ‘Big Four’, second tier banks, building societies and credit unions);
- Non-bank lenders (such as GE Capital or Moneytech);
- Capital Markets;
- Private Equity; and
- Individuals (family and friends).
Generally, Government and Large Corporate businesses have absolutely no difficulty obtaining credit and finance. Their financial fundamentals are commonly strong and they’re borrowing large sums of money. As a result, the big four banks compete heavily for their business resulting in them being afforded flexible low cost finance. Additionally they’re in a position to demand trading terms from their suppliers, further improving cash-flow. Lastly, they have a large base of shareholders to call on if there’s a need for additional capital. They usually borrow to further grow, expand and invest in their business.
There are exceptions to this, of course, not all large corporates are in such a strong position financially and those that are not may have to look elsewhere other than the banks for finance, however, for companies of this size there are legitimate alternatives to the banks. For example, Fortescue Metals Group (FMG) was able to refinance their debt via issuance of a $2.3 billion USD corporate bond issue, a mechanism which may only be viable when banks aren’t lending and such large sums of money are at stake.
Consumers too usually have no difficulty obtaining credit and finance. The big four banks, the second tier banks, building societies and credit unions all have an appetite to offer mortgages and anyone with a regular income can obtain a credit card. Whilst there has been a recent tightening on the lending criteria for predominantly property investors, consumers purchasing their own home should have a relatively easy time obtaining finance, provided they’re not purchasing beyond their means.
Increasingly we’re seeing young adults borrow from their parents in order to purchase their first property, however, to us this is a reflection of a highly priced property market rather than an inability for these individuals to obtain finance.
Which brings us to Small and Medium Business (SME) and the Mid-Market sectors.
Their reasons for borrowing are the same as for large companies, as most business owners aspire to grow their business. In our experience, however, they have enormous difficulty finding the appropriate finance and funding solutions which let them realise these growth aspirations.
They don’t have a shareholder base to call on for additional equity and they’re not in a position to dictate trading terms to their suppliers. Most importantly, the banks are not lending to them as freely as they once did and they’re having great difficulty obtaining the finance they need via means such as the capital markets and private equity.
The fact that SMEs and mid-market companies are having difficulty borrowing is well documented. The Government commissioned Financial Services Inquiry noted that SME’s have “more difficulty accessing credit than larger businesses”; the Australian Centre for Financial Studies states that “Lending to SME’s has been increasingly constrained through long term structure changes in the credit markets”; And recently, the Australian Small Business Commissioner Mark Brennan told the Productivity Commission that “access to finance for small businesses is such an issue that they are drawn into personal borrowing where significant interest charges can apply”.
Many people with a greater understanding than us have written about why this situation has arisen, but the reality is well documented.
Our experience in working with SMEs and mid-market companies mirrors the above sentiment – we hear stories about how they weren’t supported by the bank, or were offered finance which didn’t suit their needs, couldn’t obtain enough money to actually grow their business. They’re a market underserviced, and one which we’re focused on helping.
Moneytech is an Australian commercial finance organisation specialising in Trade Finance (Credit Express) and Debtor Finance (Confirmed Capital). We aspire to become trusted partners of our customers. We support their growth by both understanding their business, and creating innovative financial products based on their feedback which fulfils their needs. Continue to our web site to learn more, or call us on 1300 858 904.