Australia a nation of small and mid-sized businesses

Interesting analysis by Bernard Salt in The Australian - Australia a nation of small businesses

The Australian business community is like a pyramid with more than one million sole traders spread across the base and which continues to expand (excluding SMSFs). About 600,000 micro businesses are on the up and arguably deliver the best employment bang-for-buck when triggered into expansion mode. The bigger end of the small business spectrum (employing 5-19 employees) and the whole of the medium ­enterprise sector (20-199 employees) seems to be stagnating. And this would be of concern if the big business sector wasn’t expanding.

This highlights a common misunderstanding about mid-sized business growth drivers: there is an important constraint on growth in this segment. Our Basel III banking system makes it possible for major banks to leverage housing loans 40 times compared to less than 10 times for loans to businesses other than major corporates. As a result, business loans are highly unattractive for our banks. Instead, business banking is seen as a source of cheap deposits. EG UK banks have net deposits of £60bn from SMEs – data not disclosed in Australia but similar levels relatively.

The impact of this is quite fundamental. Most employers of 20-199 employees (1 in 4 jobs) cannot access sufficient working capital funding (ie overdrafts) to finance expansion. Most are services/knowledge-based businesses with no real estate security to offer to a bank. As a result, once micro and small businesses become successful, they get stuck badly.

We see this every week. Businesses with $10-30m of revenue and just $100-200k of overdraft, if they’re lucky. Taking on a new $1 million B2B contract with long payment terms is impossible as you need to find $200-300k just to fund long payment times for accounts receivable. Despite this, mid-sized businesses are adding jobs and we would argue this is the sector which can and will move the needle most on Jobs and Growth – with funding.

This is not the case overseas, particularly in the US and Europe where policy makers have recognised the need to provide incentives to business funders, including banks, and historically the market for business finance is deeper. Germany is the most obvious example where Middlestand businesses account for over 50% of the economy. More data here.

Fixing this problem should be a top priority for those in charge of our economy.

Note: For further analysis and potential solutions, have a look here.