Access to Finance for SMEs
Access to Finance for SMEs is critical to the growth of Australia and its position in the world:
Small and medium sized enterprises (SME) make up a massive portion of Australia’s broader economy. SMEs hire up 70.5% of private sector employees, an absolutely astounding number, and contribute 57% of the industry value added by business. As an economy, our success is heavily related to the success of SMEs. Australian politicians realise the importance of SMEs in the economy, see the latest budget for reference. They’re attempting to decrease tax rates, and increase cheap employment options for SMEs.
SMEs have had a rough few years. The global economy has come out of recession, and there is still a lot of uncertainty in capital markets and credit liquidity. Lending has tightened over the last few years, and that has put a lot of small businesses in a position which they haven’t previously been in. A third of SME’s with external finances find it hard to access finance .
To start with, let’s look at CSEF. CSEF has a lot of promise. It requires market validation and it’s a great way to enable start-ups which end up innovating, increasing the number of jobs, and the efficiency of our economy.
In addition to this, the Government’s 20% non-refundable tax offset capped at $200k per investor provides a major incentive for Angels to get involved with accelerators and venture capital. However, P2P lending is something that isn’t really focused on.
We’ve talked a lot about the regulations surrounding P2P lending and crowd sourced equity funding. Without repeating myself, the Government has taken very slow and cautious steps when dealing with P2P lending and CSEF. P2P lending has allowed SMEs to access external finance, relatively easily as well. On Marketlend and most other P2P lenders, the marketplace system rewards SMEs who are compliant, and provide as much information as possible. It allows individual investors to diversify in what they believe in, whilst bolstering the Australian economy.
It’ll be interesting to see how the Australian Government addresses the rapid expansion of CSEF and P2P lending. It’s a balancing act. Increasing compliance and regulation results in a decrease of use within these services, whilst reducing compliance and regulation might lead to very worrying results.
First loss, provision funds, insurance and structures which conservatively manage the investors risk are more likely to become common place after incidents like the lending club in US.
Investors are likely to expect more “skin in the game”.
During the global financial crisis we saw debt structures where the originators needed to invest amounts of 1-11% subordinated debt in prime insured mortgages that were secured, and all debt issuers requiring an audit when issuing debt.
It is not a distant thought that investors are likely to expect the same in the marketplace lending space. It usually starts from the US and then it will knock on around the world.
At Marketlend we have tried to get ahead of the curve by:
a) completing a due diligence with a large global accounting firm,
b) invest in each loan and as a result offering first loss protection on each loan,
c) increasing our provision on each loan to 1%; and
d) obtain full recourse insurance on the debt finance facilities.
We never try to suggest we can protect investors against losses on loans, and whislt we can be diligent in our origination, processing and collections, there will always be losses.
It is lending, and lending has risks. Investors should obtain their own independent legal and financal advice prior to investing in any investment on Marketlend.