Access to funding has long been an issue for small business, but there is hope on the horizon, writes Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman.

In September, Federal Treasurer Josh Frydenberg revealed a plan to overhaul current lending laws aimed at removing onerous barriers to small businesses applying for loans.

Since the Banking Royal Commission, small businesses have faced an uphill battle to secure a loan, largely due to unrealistic serviceability requirements from the banks.

It’s clear the pendulum has swung too far and it’s time to correct the imbalance, which is hurting small businesses that need access to finance.

Unlocking funding for small business growth

The reforms outlined by the Treasurer would play a critical role in the survival of Australian small businesses, particularly as support measures taper off over the coming months.

Small businesses need to have the confidence to seek funding to get them through this difficult period, so they can recover, grow and employ.

Even in the best of times, many small businesses struggle to secure finance, with the latest Sensis Business Index showing that of the dwindling number of small businesses applying for a loan, about one in four had been knocked back. There’s a good chance the onerous small business loan application and bank assessment process has been partly to blame.

Access to finance an issue

I’m aware of small businesses that have been asked for all sorts of documentation by the banks  – even for loans that have been 50 per cent guaranteed by the federal government – including director guarantees, which really means the family home. It’s no wonder small business owners are reluctant to borrow.

While there will be protections in place for vulnerable borrowers, I encourage small businesses to ensure their lender is an AFCA member and sit down with your trusted accredited financial adviser before taking out a loan.

While we hope credit will start flowing to small businesses as a result of removing roadblocks, there are other ways small businesses can access funding.

Australian Business Growth Fund

In the past month, we saw the establishment of the Australian Business Growth Fund, which is excellent news for high growth potential SMEs.

The Australian Business Growth Fund was a recommendation that came out of our Affordable Capital for SME Growth report, which identified a critical gap in the market for patient capital to enable our up-and-coming SMEs to succeed.

To be clear, this fund isn’t for all small businesses. It’s for established small and medium enterprises with annual revenue between $2 million and $100 million to apply for long-term equity capital investment of between $5 million and $15 million.

While businesses need to demonstrate three years of revenue growth and profitability, there is some leniency for businesses impacted by the COVID crisis, with regard to recent performance.

Minority shareholding of between 10 per cent and 40 per cent will enable these promising businesses to retain control of their company, while providing the funds they need to invest in growth.

Similar models in the UK and Canada have been tried and tested – overcoming barriers to accessing affordable capital for businesses that have gone on to demonstrate successful growth.

The fund is valued at $540 million – with investment from the government, big four banks and other financial institutions – and there is an ambition to grow that to $1 billion as it matures.

Efforts to unlock funding for high growth potential SMEs and small businesses more broadly,  will ultimately encourage business growth and economic recovery at a time when we need it most in Australia.

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