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Overcoming the Challenge of Getting Business Loans in Australia

business loans in Australia

Getting business loans in Australia can be challenging, especially for small to medium enterprises that haven’t been in business for a long time. The problem of business loans in Australia affects the ability of businesses to grow and increase employment. Here we’ll examine the causes of lack of business loans for SMEs in Australia and ways to overcome the challenge.

The impact of small to medium businesses in Australia

Small and medium businesses play a large role in creating jobs in Australia. This has been highlighted by the Australian Small Business and Family Enterprise Ombudsman and the Small Business in the Australian Economy report:

Using the employment measure of small business, there were 2,065,523 small businesses in Australia employing less than 19 people, accounting for 97 per cent of all Australian businesses by employee size. There were 51,000 medium-sized businesses, employing 20 to 199 employees, which is 2.4 per cent of all firms. Only 3,700 Australian firms employed over 200 people in 2015, meaning that large businesses account for only 0.2 per cent of all Australian businesses.

SMEs employ 7 million people, which is 67% of all employment in Australia. Plus they contribute $615 billion to the Australian economy, 57% of GDP.

Given the number of people employed by small to medium businesses in Australia, it’s essential that they have access to the business loans they need to survive and grow.

Business loans in Australia from the perspective of business owners

Each year, the Reserve Bank of Australia (RBA) convenes its Small Business Advisory Panel to learn about the challenges that small businesses face. Many of the issues raised by panel members concerned access to finance. In 2018, around 20% of these businesses reported that they found it relatively difficult to get business loans in Australia. In addition, fewer small businesses reported that it was relatively easy to access finance.

Another point uncovered is that the interest rates on business loans varied greatly between small and large business. Small businesses pay significantly higher interest rates. This difference has remained persistently higher since the global financial crisis (GFC). The RBA noted that smaller businesses faced higher borrowing rates than large companies.

Key issues faced by Australian small businesses seeking business loans

Business owners on the Reserve Bank’s Advisory Panel noted key issues they face when trying to get business loans in Australia:

  • There is limited access to finance for start-ups in Australia – given the high risks, banks are reluctant to lend to start-ups. Business owners rely on personal credit products (such as credit cards) when starting a business. Although equity finance could be more appropriate for start-ups, there aren’t many options for this type of finance in Australia.
  • Without property as collateral, banks are reluctant to offer finance – business owners wanting to expand are concerned when asked for collateral or personal guarantees. Additionally, medium-sized businesses have difficulty getting additional finance once they have pledged real estate as collateral. The result is that many entrepreneurs delay expanding their businesses until they can fund them out of retained profits.
  • The application process for getting business loans in Australia can be long and onerous – business owners say that banks aren’t proactive in offering advice on how to get finance. This makes it difficult to compare business loans and choose the right one for their needs. Another complaint is that banks require a large amount of information and paperwork as part of loan applications. After the documentation has been submitted, banks take a long time to respond. This is not suitable when a business needs funds quickly.
  • Large businesses don’t pay small businesses quickly – this is not an issue with obtaining business loans in Australia. However, the fact that small businesses are forced to act as lenders by giving extended payment periods to large businesses is a problem. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) raised this issue and the Business Council of Australia published the Australian Supplier Payment Code. Code signatories have committed to paying small businesses on time and within 30 days. Unfortunately, some large businesses have signed the code and continue to delay payments to small businesses.

Small business loans in Australia from the perspective of lenders

In response to the concerns of business owners, banks offered their perspective on small business loans in Australia. They noted that bank loans to small businesses have been growing in recent years, although at a lower rate than to large businesses.

While lending to small businesses can be profitable for banks, they tend to mitigate the risk by requiring collateral. They are also constrained by prudential capital lending requirements on lending to small businesses. These regulatory requirements encourage banks to ask for residential property as collateral for business loans in Australia.

Lenders also note that there is not a clear delineation between business and personal finances for entrepreneurs. This makes it easier for them to apply consumer lending rules to small businesses.

In researching the topic and compiling their report, the Reserve Bank spoke with a range of non-bank lenders that have entered the market to fill the gap left by banks. These include online lenders that provide short-term unsecured business loans up to $250,000. In describing, these short-term cash flow lenders, the report noted:

These lenders are generally providing short-term unsecured cash flow finance of up to $250,000, with a streamlined loan application and decision-making process. While these lenders are growing rapidly, overall they remain a very small share of small business finance. A key issue faced by these lenders is their high cost of funding relative to the banks. This is related to the fact that unsecured small business lending is a relatively high risk, and is one reason why these lenders often charge very high interest rates.

Improving the ability to get small business loans in Australia

Based on the panel discussions with businesses, lenders and other stakeholders, the report offers ways business owners can increase their access to business loans in Australia. One challenge is that a large percentage of small businesses do not use accounting software to keep up-to-date and accurate records. One report noted that 45 per cent of small businesses don’t use accounting software. This lack of financial record keeping makes it difficult to get business loans in Australia.

One issue brought up by lenders was that many small businesses don’t understand what determines creditworthiness. For example, a small business owner might apply for several personal credit products, such as credit cards or vendor finance.  Too many finance applications and credit checks negatively affect their credit score. Business lenders have suggested that there needs to be more information about the factors that influence creditworthiness.

Another way that small businesses hinder themselves when seeking business loans in Australia is not paying tax obligations on time. Many small businesses don’t know that having an outstanding tax debt has a negative impact on their credit assessment. This makes it more difficult to get business loans from banks in Australia. ATO tax debt can also appear on a personal or business credit history.

So the main messages for small business seeking loans in Australia are:

The full Access to Small Business Finance report offers more details on the challenges of getting small business loans in Australia and potential solutions.  

The Affordable Capital for SMEs Growth report covers this issue and offers recommendations for improvement.

If you are ready to get a business loans, get more information about business loan basics.

Also, check out Frequently Asked Questions on How to Get a Business Loan.


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