Investment by Australian small to medium enterprises (SMEs) is at a historically low level despite theoretically favourable conditions for investment. To understand this problem more fully and determine possible solutions, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has consulted with a range SMEs, representative organisations, advisors and experts across the sector.
Business people invest when they are confident and have access to capital. Information is mixed on business confidence. People are confident about their own business but less so in the broader Australia or global sense. There are challenges around disruption (eg Amazon, Uber, Airnb) where there is a need for proactive and sound Government policy so there is confidence in a level playing field.
Resounding feedback from the sector is that access to finance remains a significant barrier despite a healthy pipeline of businesses suitable for investment. If there are barriers to access to finance then this stifles business growth, employment and investment. Our market simply does not work well for smaller businesses.
A key factor points to policy and regulatory settings that having negative consequences on lending practices, capital availability and a competitive financial services market for SMEs. There are two main reasons:
(1) Traditional bank loans are backed by real property mortgages and a lack of finance alternatives
Australia’s prudential rules are focused on system stability and this incentivises banks to focus lending against real property security. This has the effect of increasing the cost of capital on other lending and, to a very large degree, destroying the ability of businesses to obtain funding secured against other business aspects, such as cash flow.
Young aspiring small business operators are particularly disadvantaged and increasingly rely on their parents to provide seed finance. The “Bank of Mum and Dad” offers convenience and flexibility but puts retirement savings at risk. It also raises social equity issues in that the children of affluent parents have greater opportunities.
(2) Australian superannuation regulation and the small contribution to Australian private equity
Australian superannuation funds are not primarily focused on medium to long term returns. Superannuation regulation instead focuses the funds on being able to publicise low fees whilst liquidity requirements mean that investment is biased to liquid assets such as traded securities. The flow-on effect is that Australian superannuation investment then looks to foreign liquid investment opportunities, overlooking the potential for investment via Australian private equity or venture capital markets.