Running a business isn’t easy. It’s all consuming, ever-changing and with the wave of digitisation, means modern businesses are practically running 24 hours a day, 7 days a week. Many people will remember the 'Crackberry' almost 20 years ago as an early catalyst. It was one of the first mainstream personal devices that allowed people to send work emails from home which was not great for work-life balance, but fantastic for showing your boss that you're still beavering away at midnight!
Fast forward to today. With the proliferation of smartphones and the heightened need for instant gratification, most goods and services can be bought, sold or shared in just a few clicks. And just like the modern 24 hour news cycle, the business environment has become much more dynamic and fast-changing. It's become necessary for business owners to keep up or be overtaken by more agile competitors. A lot of aspects of running a business have kept pace with the changing world and cloud accounting is a great example of this. However, until recently, accessing business finance has been lagging developments in other areas.
Traditionally, your local bank – most likely the one you have banked with since you were a kid – would be your first port of call for some funding for your business. They would have asked for a business plan, reams of supporting documents, probably a mortgage on your home, and with a little luck you might have received an approval two months later.
These days, the process for applying for business finance from a bank is pretty much the same and they take just as long to give you an answer. The main difference for small businesses is that the outcome is commonly a 'no'.
Now, that’s not to say banks won’t lend to you. They're generally very happy to lend to large businesses and are more comfortable if you put your house up against it as collateral. Outside of this it can be a drawn out, frustrating and ultimately disappointing experience for many small businesses.
Where have the banks gone?
Bank lending for Australian businesses as a percentage of gross domestic product (GDP), has fallen from 62 per cent in 2008, to 48 per cent in 2019. And, even then, it's mostly to the big end of town (check out the chart below). This started with the Global Financial Crisis back in 2008, when banks withdrew from certain types of lending. During this period, they had to put aside a larger portion of capital as a buffer against their potential losses. Now banks often need to hold five times the amount of capital against unsecured business loans than they would for a residential mortgage. In order to keep earning strong returns for their shareholders, they've chosen to step back from any lending, whether it be business and personal, that isn’t backed by a property mortgage.
Trust me, I'm a banker.
The findings from the ‘Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’ haven't helped banks lend more to small businesses either. They are now so busy putting out fires and trying to rebuild trust with Australian people that it's made them even more conservative and focused on what they do best – lending against bricks and mortar only.
According to a study completed by Swinburne University, reported in The Conversation, a third of Australians believe that banks show no leadership when it comes to the greater good. What’s even more frightening is that this score is slightly worse than public perceptions of our Federal Government and significantly worse than trade unions. Clients are looking for honesty, transparency and a feeling of trustworthiness from banks, and right now they’re feeling that this simply doesn’t exist. Another study conducted by Deloitte found that just 20 per cent of participants feel that banks have their best interest at heart and just 21 per cent of participants felt that banks are ethical and that they do what is good, fair and right. Oh, and just a quarter of survey participants believe that banks actually keep their promises. Ouch.
So, whilst the banking industry starts the task of winning back the hearts and minds of Australians, where does this leave small businesses that require finance to help them grow? Find out in Part Two and Part Three of our Rise of Australian FinTechs blog in coming weeks.