Wouldn’t it be nice to hear a story of how one of Australia’s big banks supported an entrepreneur from start-up to a public listing? Well, you would be hard-pressed finding one. The Global Financial Crisis and changes to the regulatory environment (e.g. the National Credit Code and the introduction of BASEL II prudential regulation framework in 2008) led to banks avoiding excessive risk and tightening the availability of credit to a point where it probably inhibited growth or at the very least, directed funds towards less productive, lower growth sectors of the economy. That’s perfectly understandable.
The problem is, however, that almost 9 years post-GFC and not much has changed, especially in terms of business lending.
If you’re in the market to purchase an existing business, most of the top banks still have credit policies limiting lending to 50% of the business valuation, compared to up to 80% pre-GFC. And if you are seeking lending to start a new business, be prepared for a very, very hard time. I hear it first hand from clients all the time — the banks won’t lend because we have no collateral. We can’t get credit because we don’t have a trading history. The banks won’t loan to us because our credit card debt is too high. The list goes on.
Banks have an obligation to their shareholders. Banks also have an obligation to consumers. So, surely, with the affluence of Australia’s cashed-up banks, there is some room to move when it comes to business lending. If the concept and strategy, cash flow projections, marketing plan, financial plan, and the expertise and experience of the owners all stack up, then why won’t the banks take a calculated risk? Sure there is a downside risk, but there is just as likely an upside risk, with potentially higher returns to the bank and to shareholders.
You can’t help but think that the art of banking disappeared a long time ago, with the average business banker now having little or no discretion in swaying the credit department and instead, operating to a strict credit checklist that is ready to obliterate your hopes and dreams of buying or starting a business.
Innovation has never been a scarce resource in Australia. The Australian attitude of ‘having a go’ gives us a strong culture of innovating, yet too many of the ideas end up being fostered and brought to fruition by other countries, and no doubt this is partly due to the risk aversion of our banks.
The strong financial position of the banks, coupled with a low interest rate environment, are ideal conditions for banks to invest money into higher-risk start-up ventures and shift funds away from our property-obsessed economy. The growth and employment prospects this would bring to our economy would be remarkable.