Who’s missing the point on bank lending?

Small Business and Family Enterprise Ombudsman Kate Carnell was back in the news recently as she rightly derided claims by Australia’s banking leaders that lending to SME’s is booming.

Carnell said the banks’ arguments ‘miss the point’ when it comes to small businesses, because they only tend to lend where there is strong security – usually in the form of property.

She told the Institute of Public Accountants: “Small business start-ups struggle to obtain affordable finance because the banks require them to have property security or significant cash equity. How do we help an energetic, clever young woman or man start or acquire a successful small business with high cash flow if they don’t have security?”

Well Kate, we have a few suggestions.

Better than business loans

It’s interesting that Carnell mentions cash flow, because the solution to many businesses’ financing needs is right there. These businesses need money now to buy from their suppliers, but they also have plenty of cash coming in, as they fulfil orders for customers. Often the only problem is a disconnect of a few weeks between paying the bills and receiving the money they are owed.

This conundrum applies to many profitable small businesses across Australia, and indeed the world. However, the best solution is not a business loan, which is expensive, prescriptive and inflexible. Indeed, business loans – whether from a bank or a so-called alternative lender – often create further cash flow problems because the recipient business is then committed to making monthly payments regardless of seasonal or other fluctuations in trade.

We would argue that for most profitably-trading businesses, some form of cash flow financing is a much better option. This is because cashflow or debtor finance reflects a firm’s current trading position, and isn’t really debt at all: it’s simply a handy way of bridging that crucial gap between bills to pay, and accounts receivable.

Paying an invoice discounting firm, like OptiPay, is never a cash flow problem, because the money comes straight from your customer.

There are many forms of invoice discounting: from the less flexible but more ‘hands-on’ factoring services where a business hands over its sales ledger to the finance company, to OptiPay’s totally flexible invoice discounting. And OptiPay’s Accelerator Funding now provides a middle ground for those wishing to use their sales ledger to obtain prompt payment discounts.

It’s banks that are looking pointless

We could carry on explaining why debtor funding can often be superior to traditional borrowing but then we might be in danger of missing the point ourselves: the fact is, banks only want to lend against major assets such as property and this isn’t always possible or convenient for ambitious entrepreneurs who have put all their financial efforts into their business.

As Carnell has also pointed out, the regulatory system strongly incentivises banks to act this way. This leads to an interesting conclusion: it’s not that banks are missing the point of small business; many businesses are no longer seeing the point of banks.

With a wealth of competitive and convenient financing options available, even those successful entrepreneurs who have property in their business or personal assets will not be applying for a bank loan as their first choice of business funding. So when banks finally do learn what the point was, they will be doing it the hard way.

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