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Amount of documentation required is holding SMBs back from applying for business loans: report

Access to capital, or lack thereof, is the greatest pain point or perceived threat to the long-term growth aspirations for one in five Australian small business (SMB) owners, a new report has found.

Through a survey of 500 Australian SMB owners, the Xero State of Lending Report, from cloud accounting software provider Xero, also found that a quarter of SMBs are not very confident in their ability to invest in their business.

Were they more confident, the report found, those surveyed stated they could consider borrowing an average of more than $85,000 in the next 12 months, and almost $160,000 over the next five years. Among the top areas in which SMBs would invest if they had funding available are marketing, equipment, and hiring more staff.

Ian Boyd, financial industry director at Xero Australia, said, ““Small businesses are the engine room of the Australian economy, and most have clear aspirations for growth; however the fact is that access to capital continues to be an issue for many.

“The responsibility to fix this funding gap doesn’t sit squarely with one group. Government, financial services firms and the accounting sector all have a part to play in helping small businesses understand the options for financing.”

Rather than loans, the report found 67 percent of SMB owners aiming for growth will look to fund their growth activities through their business profits, while 19 percent will rely on personal savings. Just eight percent of SMB owners surveyed who are focused on achieving long-term growth will opt for a business loan.

According to the report, part of the reason why SMB owners are choosing to forgo a business loan is the amount of documentation required, with 80 percent stating it was onerous. More than three quarters of those surveyed said obtaining business loan is difficult for small business.

Over 40 percent of those who have borrowed from a lender said the most difficult part was manually providing the lender with their financials, while 39 percent said the process of applying for a business loan was more stressful than buying a property.

Here technology can play a role, with 71 percent of SMB owners surveyed stating they would be interested in applying for a loan if there was an electronic process to facilitate it, and create the documentation on their behalf.

The State of Lending Report follows the release of a report from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in June that determined more had to be done to connect small to medium enterprises (SMEs) to finance.

Among the recommendations put forward in the report was the development of new prudential measures from the Australian Prudential Regulation Authority (APRA) to allow regulated institutions to apply risk weightings to specific risk factors, and the creation of a Government Guarantee Scheme.

The ASBFEO suggested that member banks could draw on the guarantee as a form of security, with this facilitating increased lending to SMEs with a viable business model but without real estate to meet bank security levels.

Also recommended was the creation by the ASBFEO of a guide on financial providers and the range of products available to small businesses.

The reports are the latest to look at the state of financing for SMBs and SMEs, with the banking royal commission earlier this year raising questions around small business loan terms; ASIC was questioned for not taking strong action against banks who were not compliant with unfair contract legislation put in place in 2015.

A report released by ASIC and the ASBFEO released in March found the four major banks had not taken the necessary steps to comply despite begin given a “generous” one year transition period to meet the implementation deadline in late 2016.

Small business groups have since been pushing for simpler contracts from banks and fintech lenders to ensure small business owners are fully aware of what they are signing; contracts have often been too long and complex, written in legal jargon, the ASBFEO stated.

Image source: City of Melbourne/ That Startup Show / Photographer Wren Steiner





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