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Ombudsman launches inquiry into small business funding gap

The lack of funding for small business is the next target for the Small Business and Family Enterprise Ombudsman who is launching an inquiry into the issue on Wednesday.

“All sides of politics are very good at saying small business is the engine room of the economy but it is bloody hard to run that engine if you don’t have petrol and that petrol is finance,” Kate Carnell told Fairfax Media.

“You can’t grow a business if you dont have access to finance , it’s that simple.”

Carnell says the funding gap is “a very big problem” for SMEs in Australia with the Productivity Commission’s draft report for its inquiry into competition in the Australian financial system finding that SMEs did not have access to the finance they need to grow their businesses.

This was backed up by Barriers to Investment research conducted by the Ombudsman’s office last year.

“The big banks have about 80 per cent of the small business business in Australia and the big four banks are not lending to small business unless they have significant equity in property,” says Carnell.

“The banks will tell you there is plenty of money, but there is only plenty of money if you have bricks and mortar.”

Carnell says “significant numbers” of small business owners don’t own their own home or if they do, they don’t have a lot of equity in it.

Carnell says the inquiry will investigate international initiatives that provide affordable capital to SMEs to start and grow their business alongside local solutions for supporting small business start-ups and growth.

The inquiry, Affordable Capital for SME Growth, will consult with Australian and international experts in SME lending and risk management, and liaise with Australian regulatory bodies.

The former pharmacy owner turned small business ombudsman says the funding gap in Australia continues to grow as banks now want to secure any significant loans against property.

“When I bought my first pharmacy in the early 80s the banks were willing to lend based on a good business case and balance sheet lending,” she says.

“What has changed is Australian Prudential and Regulatory Authority rules have made lending against property a lot more profitable for banks then lending against small business and businesses which are seen to be more risky.”

Carnell says the Australian bank and regulatory framework is not unique in focusing on property based lending however other countries have developed solutions to the problem.

Of particular interest to the ombudsman is the British Business Bank, the US Department of the Treasury’s Small Business Lending Fund and closer to home the Jobs for NSW scheme.

“When we looked around the world, Australia is not unique in this space, and it was interesting how many countries have got solutions to this actual problem,” Carnell says.

“It’s not about handouts for business. We are not even vaguely interested in that, we are interested in what needs to happen to deliver a market for small business loans that is actually working. It isn’t working very well at the moment.”

Carnell says the federal government has failed to focus on the funding gap.

She says it is “surprising” that APRA, the Reserve Bank and the Australian Securities and Investment Commission have not done any work on the impact of changing prudential requirements on small business lending.

“The feedback was ‘Our job is financial stability, not the supply chain,'” says Carnell. “I think that is a pretty narrow view.”

While the growth of fintech lenders and the launch of challenger bank Judo offers some alternatives for small business, Carnell says more needs to be done.

“The funding gap is getting worse and there is nothing obvious that is in the marketplace at the moment that is going to make it better,” she says.

The inquiry report will be released in July 2018.

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