Small Business Lending by Banks remains in the Doldrums, holding back wages and jobs growth

The latest figures on Business Lending from the Reserve Bank of Australia show that only 10% of new loans in the year to September 2017 were made to SMEs, a growth rate of 4% pa.

Larger loans, mainly to corporates (although not clearly segmented by the RBA sadly), increased by 16% over the same period and accounted for 90% of new loans.

When we see the headline that "Business Lending Increases by 13%", it is never reported that most of it went to the Big End of town.

Of the 10.5 million Australians working for the private sector (and supporting the 2 million in government jobs), it is widely recognised that more than 2 in 3 work for Small-Medium Sized Businesses. Only 700,000 work for our 10 largest companies and most are cutting jobs.

Almost half the new jobs created since 2004 were in established, innovative High Growth Firms, most of whom employed less than 200 staff and represented less than 1 in 10 of Australian businesses, as reported by the Dept of Industry, Innovation and Science.

SME Lending Sept 2017.PNG

The latest lending figures maintain a long term trend where bank lending to SMEs is barely creeping forward compared to lending to larger businesses, mainly corporates. And we suspect that most of this SME lending is supported by real estate lending so is it really SME lending at all?

SME Lending 10 Yrs to Sept 17.PNG

Unfortunately, in its efforts to make Australian banks ‘unquestionably strong’, the banking regulator APRA has recently argued in a discussion paper that bank lenders should hold more capital against loans to small businesses than required globally.

This coincides with a Financial Times article headlining that in the UK "Small businesses look to specialist lenders for loans" as bank lending flatlines:

Out of the UK’s total of 5.7m small businesses, only 1.7% applied for a loan or overdraft last year, the fifth consecutive year of decline since 2012.
Fewer small businesses are applying for loans than in the past five years and more of them fear that if they did they would be rejected, according to the latest report into small business finance by the British Business Bank, a government-backed development bank.
The report said bank lending to small businesses was flat last year, while asset finance increased 12 per cent and peer-to-peer lending rose 51 per cent. Equity investments in small businesses rose 79 per cent by value and 12 per cent by number.

On the positive side, the Alternative Finance "Fintech" sector which started later here than in the UK is growing to fill the void. However, there is a very large gap to fill, awareness is low and the amounts that are typically available are less than $100,000. 

Meanwhile, instead of fixing this market failure,our politicians are distracted by Ministerial Misconduct whilst confusing efforts to reduce corporation tax for our largest companies with tangible support for the engine room of our economy.

Access to affordable finance is a critical obstacle holding back most of our successful family-owned businesses from growth. Meanwhile, the banks just want our houses.