The Morrison government will inject $2 billion into the small business loan market in an unprecedented effort to boost lending to cash-starved firms which have complained of a worsening credit squeeze.
The creation of a taxpayer-backed securitisation fund to invest in small and medium enterprise (SME) credit will also potentially expand an asset class for institutional investors such as superannuation funds to invest in.
Treasurer Josh Frydenberg and Small Business Minister Michaelia Cash will announce the small business funding policy on Wednesday, promoting the soon-to-be-established Australian Business Securitisation Fund as a way to overcome banks typically only lending to the self-employed when they pledge their personal home as collateral.
The government fund will buy packages of secured and unsecured SME loans issued by smaller banks and non-bank lenders such as fintechs, boosting funding to these non-big bank lenders to lend to small businesses and potentially lowering SME borrowing costs.
The shake-up would increase competition against the big four banks which account for more than 80 per cent of business loans of less than $2 million and charge an interest rate premium of up to 4 percentage points more to small firms.
“Small businesses find it difficult to obtain finance other than on a secured basis – typically, against real estate,” Mr Frydenberg and Senator Cash said in a joint statement.
“Even when small businesses can access finance, funding costs are higher than they need to be.
Underpin economic growth
“To overcome this and ensure that small businesses are able to fulfil their potential and continue to underpin economic growth and employment, the Australian Business Securitisation Fund will invest up to $2 billion in the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms.”
Separately, the government is working with the Australian Prudential and Regulation Authority to try to get regulatory capital relief for a proposed different Australian Business Growth Fund, so banks could more easily invest equity into small firms for the longer term.
National Australia Bank, Commonwealth Bank of Australia and HSBC are among the banks to have expressed interest to the government in the concept.
Mr Frydenberg will host industry representatives in Canberra in late November to discuss the equity growth fund.
The United Kingdom’s Business Growth Fund has invested about $2.7 billion in a range of SME industries.
The Australian Financial Review revealed on October 28 the government was developing a suite of economic measures to boost small business, as Prime Minister Scott Morrison prioritises smaller companies ahead of the “big end of town” entering the election race.
The policies include boosting access to funding for small business to overcome a purported credit squeeze, improved tax dispute resolution with the Australian Taxation Office and helping small companies get paid faster by large customers.
For the confirmed Australian Business Securitisation Fund, Treasury’s Australian Office of Financial Management (AOFM) will invest in pools of SME loans, probably for five to 10 years, to support the development of the local securitisation market.
It is a similar way that the AOFM, under direction from the Labor government, bought almost $16 billion of residential mortgage backed securities (RMBS) to keep alive non-bank home lenders during the 2008-09 financial crisis, after an initial injection of $4 billion.
Small business advocates have claimed they are facing a credit crunch and have partly blamed the royal commission into financial services for causing nervous banks to slow lending to the self-employed.
Council of Small Business of Australia chief executive Peter Strong said SMEs were finding it harder to access credit in Australia.
“The fact is some small business owners are going overseas to get loans and that just shows something is incredibly wrong here at the moment and we’ve got to fix it,” Mr Strong said.
The Productivity Commission found that interest rates charged to small firms were up to four percentage points higher than borrowing rates applying to residential housing and overdrafts for large businesses.
The immature securitisation market for unsecured SME loans is worth only about $125 million, compared to total securitisation issuance in Australia of about $96 billion in the last two years, such as for mortgages, car loans, personal credit and credit card debt.
Boosting investor demand for SME debt and trying to encourage local super funds and foreign investors into the fledgling market would boost liquidity in the immature market.
The initial injection of $2 billion will be reviewed after two years.
The government intends to minimise taxpayer risk by investing in highly rated securities and consulting with credit-rating agencies.
Small firms have always found it challenging to access debt finance, but the problem has become more acute in recent months.
The Reserve Bank of Australia has said that access to finance for small businesses is important because they generate employment, drive innovation and boost competition in markets. Small business employs about 5 million people.
“The proportion of small businesses that perceive it to be relatively easy to access finance has declined recently,” the RBA said in a September report.
The RBA said small business credit conditions were better than just after the 2008 financial crisis, but about 20 per cent of small firms report that they have found it relatively difficult to access finance.
Some business bankers privately admit credit to small firms has tightened due to the royal commission’s highly legalistic interpretation of responsible lending laws, stricter loan serviceability rules enforced by the prudential regulator and weaker house prices.
Falling Sydney and Melbourne house prices have also contributed to slower small business credit growth and more difficulty in refinancing small business loans, bankers say.