Getting in on the act: why bank competition is needed for small businesses

Australian small business owners without brick-and-mortar assets are being held back from accessing much needed funding, but that could be about to change, as the Australian Small Business and Family Enterprise Ombudsman has thrown its support behind proposed changes to the Banking Act.

Currently, restrictions set out in the Banking Act mean that in order to use the term “bank” in its name, an authorised deposit-taking institution needs to hold at least $50 million in Tier 1 capital. The changes, announced by Treasurer Scott Morrison in July, would mean up-and-coming and non-traditional lenders would be able to use the word “bank” along with more established lenders.

According to Ombudsman Kate Carnell, the changes to the Banking Act could ramp up competition among lenders and make it easier for small businesses to access financing.

“The power and control of the established banks remains a barrier for small businesses seeking capital to start or expand their operations,” she said.

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Carnell also noted that the requirement for “bricks-and-mortar security” common among major lenders can be a significant barrier for small business owners who don’t own their own property. It’s of particular concern these days, when many young people are being blocked from entering the property market by skyrocketing housing prices.

CEO of business lender GetCapital, Jamie Osborn, agreed that not having a property to put up as security is a common problem for Aussie small business owners.

“We see it all the time, growing businesses with strong cash flows and a profitable business that need working capital funding to take their business to the next level. Unless they have excess equity in a property, it is very hard for them to get Bank funding,” he said.

According to Osborn, one of the reasons banks often require business borrowers to have bricks and mortar security has to do with the way APRA regulates capital requirements for banks.

“Generally speaking, for the purpose of capital requirements, APRA applies a 25% risk weighting to property secured loans and a 100% risk weighting to unsecured loans. This means that Banks need to hold at least 4 times as much prudential capital against an unsecured business loan as they do against a mortgage,” he explained.

GetCapital's recent Small Business Credit Survey showed that one of the main reasons small businesses didn't apply for credit last year was that they didn't have sufficient collateral for a loan.

“The good news is that a range of unsecured lending options offered by non-Bank lenders have emerged in the Australian market in the last few years. The bad news is that many small businesses don't know that these alternative funding options exist,” said Osborn.

But with the proposed changes to the Banking Act set to level the playing field for alternative lenders, lacking a property for security may not be such a hurdle, as Aussie small businesses could discover a range of new unsecured lending options from outside the major banks.

If you’re a small business owner looking for financing, head over to our business loan comparison table to check out some of the leading non-bank lenders in the market and find the right fit for your business.