Briefing paper

Request for information reforms to small business lending: background paper 11

9 May 2018

At the request of the Royal Commission, this information note identifies reforms affecting SME lending introduced since 2007. There is, however, no common definition of a small or a medium enterprise used in Australia. The reforms outlined in this information note primarily concern reforms that are of relevance to small businesses rather than medium sized enterprises which are treated consistently with larger enterprises within the regulatory framework.

External finance plays an important role in providing small businesses with the funds they need to grow and create jobs. A significant focus of reform efforts in relation to small business finance has been on improving access to finance for these businesses. The issue of access to finance for SMEs was identified as one of the four main concerns in relation to the flow of funding in the Australian economy by the Financial System Inquiry (FSI) in 2014.

The cost of finance is a significant issue, with small business loan interest rate spreads widening markedly during the Global Financial Crisis and remaining elevated since then. In part this can be explained by changes in risk appetites by lenders and their assessment of the riskiness of small business loans, but it is also a consequence of a less competitive market than that for large businesses (who can access credit from foreign banks and capital markets).

Obtaining credit can also be an issue for certain types of small businesses. While 90 per cent of credit applications by small businesses are approved, the major part of this credit is secured by property. Unsecured credit is harder to obtain. This places start-ups and rapidly expanding businesses at a disadvantage, particularly those with younger owners who are less likely to have existing assets, such as a home, to provide as collateral. Unsecured lending also comes at a significantly higher price.

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