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The Two Billion Dollar Small Business Fund. Your Questions Answered.
Australian small businesses that need a cash injection to fund their expansion dreams may find loans easier to come by in the near future. The federal government has announced the Australian Business Securitisation Fund (ABSF) and a plan for legislation to go before Parliament in early 2019. The Liberal government believes these funds will add jobs to the marketplace and money to the economy, but for small business owners the big question is, “What can it do for me?”
What is the scheme?
The ABSF is a loan scheme, although it won’t be loaning directly to small and medium enterprises (SMEs). The structure hasn’t been finalised yet, but the fund will allow lenders to package loans and sell them to the fund. This lets them move loans off their balance sheets, so they have more money free for new loans.
Why is it needed?
It’s hard for SMEs to access loans in Australia, and the loans that can be obtained are expensive. Currently, 80 percent of business loans under $2 million are from the big four banks. Small banks and non-bank lenders can’t access money, so they’re unable to offer competition to the big four. Because SME lending is less profitable than home loans, banks have less money available for these loans.
The ABSF will give alternative lenders more money to offer to SMEs. The fund can only be used to buy small business loans, so there will be more funds available for small business owners.
What will it do for small businesses?
The fund will improve access to loans and lower their cost. At the moment, many small business owners bootstrap their businesses with credit cards. When they’re ready to expand, it’s often easier to mortgage their houses than get a business loan. The government’s plan will support both secured and unsecured loans, so it will be easier for owners without property to get approved.
Small business loans currently cost up to 4 percent more than home loans. For businesses with low margins, this may put loans outside of their budget. Even if they can afford to service their loans, the high interest rates mean they’re not able to put as much money into growing their business.
The improved competition that’s expected through the fund will bring costs down and allow more business owners to access funds.
Will it work?
Not everyone thinks the fund will work. Studies show that most Australian businesses have no expansion plans. There is also the argument that businesses need knowledge more than money to help them expand.
This doesn’t take into account that many businesses don’t have expansion plans because they know they can’t get money to make them a reality. This fund may prompt them to start taking steps to bring their dreams to fruition. It will also help those business owners who do have plans to get started on them.
It is important to remember that the fund doesn’t loan directly to businesses, so all loans go through normal approval processes. This means risky business propositions may still have difficulty finding funding.
What about the Australian Business Growth Fund?
This idea was announced at the same time as the ABSF, but that money is not being funded by government. Instead, the government is removing barriers, so banks and others can invest in businesses. This would allow businesses to grow without giving up control to investors or taking on debt. It will depend on certain rules being loosened, but Treasurer Josh Frydenberg has already had talks with interested parties to start the ball rolling.
Do I have other funding options?
Legislation recently passed to extend crowd-funding eligibility. With red tape removed, small businesses may find this an attractive option. It’s especially good for new start-ups and businesses with innovative ideas that capture the imagination of the public.
Businesses can also look into grants. Many state and local governments offer business grants for specific industries. Explore your state or council website to see if help can be found in that quarter.
Whether you’re buying or selling your business, contact a LINK business broker today. LINK’s professional business brokers can help you evaluate your next steps.