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$2bn to back our ‘strivers’

Opinion Piece

Date : 15 November 2018

Author: The Hon. Josh Frydenberg MP

Publication: The Australian

More than 70 years ago Sir Robert Menzies spoke of the forgotten people. Among them were the shopkeepers, the skilled artisans and farmers. These small business people were in Menzies’ words “the strivers, the planners, the ambitious ones” and represented the backbone of the country. This is as true today as it was then.

With more than 2 million small and medium-sized businesses accounting for almost 70 per cent of the private sector employment and paying out more than $300 billion a year in wages, they reach into every corner of our economy.

Critical, however, to small business success is access to finance, something which a number of enterprises are finding difficult. Indeed, the Reserve Bank of Australia said that in contrast to large businesses it is “challenging for young small businesses to fund their expansion plans”.

In most cases banks will only lend to small businesses where real estate, typically the family home, is provided as collateral. Even the interest rate charged to a small business person can be, according to the Productivity Commission, up to four percentage points higher than if they were seeking a home loan.

With banks responsible for more than 80 per cent of loans that are less than $2 million, there are few alternative funding routes. The Coalition government is determined to change this dynamic and will do so with a $2bn securitisation fund. This fund is designed to address a market failure where non-bank lenders or small banks outside the big four are unable to access funding on competitive terms. This is because existing securitisation markets are not sufficiently developed as to allow these lenders to repackage their loans to investors.

The Australian Office of Financial Management (AOFM), which sits within the Treasury portfolio, will now participate in the small businesses securitisation market, purchasing securities offered by these non-bank and smaller bank lenders.

The government through AOFM has previously participated in securitisation markets in the wake of the global financial crisis. From 2008 onwards, more than $15bn was deployed in the Residential Mortgage Backed Securities market helping lenders continue to provide access to affordable credit to households.

This time we are doing it for small business as there has been limited securitisation activity with only two $125m rounds for SME loans. Through the AOFM, government exposure will be managed with due diligence undertaken, including working closely with the rating agencies. It is important to understand the government is not lending to small businesses, but providing funding support to the lenders that is currently not available.

The other significant initiative the government is promoting is the creation of a private sector owned and funded Business Growth Fund. Modelled on successful and similar initiatives in the UK and Canada, the Growth Fund, with support from the major banks and potentially super funds, will take passive equity stakes in small businesses.

Until now, lenders have been reluctant to take equity because of more conservative treatment under APRA capital standards, compared to debt financing. APRA has signalled they are willing to review these arrangements to assist in the facilitation of the establishment of the fund.

As a result of the new fund, we will see small businesses have more options to fund their growth. If equity is small businesses’ preference over debt, then the Growth Fund can enable this to happen. In the UK, more than $2.7bn has been invested in the past seven years through a business growth fund, with small businesses across multiple sectors the beneficiaries.

The Coalition is determined to support small business in every way we can. Recently, we legislated tax relief for 3.3 million small and medium enterprises employing about seven million Australians. The successful $20,000 instant asset write-off for small business is available until next year and employee share ownership schemes will be simplified and the value of shares that can be offered under them doubled.

The announcement of the $2bn Securitisation Fund and the Business Growth Fund is a continuation of our commitment to today’s “strivers, planners and ambitious ones” that underpin Australia’s growing economy.

Josh Frydenberg is the Federal Treasurer.

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