Prospa Seeks $500m in SME Loans After Raising

From Smart Company.

Small business lender Prospa is gearing up to hire an additional 100 employees in its next stage of expansion, after this week securing a $25 million cash injection in what is believed to be the largest fintech venture capital investment in an Australian business.

The 2016 Smart50 winner says the investment round, led by Australian venture capital firm AirTree Ventures, will shore up the company’s ability to dominate the small business lending landscape on its path to writing more than $500 million in loans.

“It’s a great story for Australian VCs, and really just cements the general market awareness of how Australia can build great tech companies,” co-chief executive Beau Bertoli tells SmartCompany.

Prospa will be using the funds to further develop the technology side of the business, and with several new projects on the go, Bertoli says the funding injection will also allow the business to keep investing in people.

“It does require a lot of people—the costs are going to be in hiring, we’re going to be looking to hire about 100 over the next year. We’ve put a lot of thought and planning into it this year—it’s not the first time we’ve tried it,” he says on hiring big cohorts of staff at once once.

The Prospa platform, which allows small businesses to apply for unsecured loans of up to $25,000, launched in 2011 and previously raised $60 million in capital in September 2015.

The lender has written more than $250 million in loans, and recorded revenue of $22 million for the 2016 financial year. The current valuation of the business is $235 million, says Bertoli, and while that’s a “substantial” number for an Australian fintech operation, he believes there’s still plenty of room to grow.

“We’ve got a really long way to go,” he says.

“It all comes back to the customer problems, and they can all use capital at different times.”

Prospa has developed a number of strategic partnerships with the likes of Westpac and Mortgage Choice, but Bertoli says the company’s connection to smaller operations has also contributed significantly to its growing the loan base.“We work with around 4,000 partners around Australia, from Westpac to small little accounting firms,” he says.

“That gives us access to well over half of Australia’s small business customers. We’re able to work with lots of [those partners] and get access to their customers.”

Why small business tax cuts aren’t likely to boost ‘jobs and growth’

From The Conversation.

The Turnbull government’s signature economic policy at last year’s election was a 5% cut in the company tax rate, over a ten-year period, at a cost to revenue estimated to be in excess of A$48 billion. As the government itself has conceded, this now stands very little prospect of being passed by the Senate.

However, there is one element of the government’s proposal which appears to enjoy almost universal political support – the idea that “small” companies should get a tax cut. The only disagreement among the Coalition, Labor and the Greens on this score is how small a company should be in order to be deserving of paying a lower rate of tax.

From the standpoint of good economic policy this is surprising. There has been a lively debate for a while among economists as to whether cutting company tax rates will boost economic growth, employment and real wages – and the extent to which this theory is supported by evidence. But there is no evidence at all to support the notion that preferentially taxing small businesses will do anything to boost “jobs and growth”.

Advocates of tax and other preferences for small businesses often argue that small businesses are the “engine room of the economy” – because, for example, 96% of all businesses are small businesses, or because small businesses employ more than 4.5 million people.

According to the latest available ABS data, small businesses (defined as those with fewer than 20 employees) employed just under 45% of the private sector workforce in June 2015. Despite this, small businesses accounted for only 5.2% of the increase in private sector employment over the five years to June 2015.

By contrast, large businesses (defined as those with 200 or more employees) employed less than 32% of the private sector workforce in June 2015 – but they accounted for more than 66% of the increase in private sector employment over the five years to June 2015.

Employment and employment growth by size of business

ABS Australian Industry (8155.0) 2014-15, Author provided

Similarly, a smaller proportion of these small businesses engage in any of the four categories of innovation which the ABS recognises in its annual survey of business innovation than of medium or large businesses.

ABS, Summary of IT use and innovation in Australian businesses (8166.0), 2014-15, Author provided

So on the basis of the available evidence, a policy which sought to encourage employment creation and innovation via the use of preferential tax treatment would surely preference large businesses, rather than small ones.

However, that would be politically challenging, given that a large majority of voters think that big companies should pay more tax, not less.

What sort of businesses create jobs and growth when tax is reduced?

An alternative approach, which would be much more likely to have positive effects on employment, investment and innovation, would be to tax new companies at a lower rate.

OECD research shows that young businesses are the primary drivers of job creation. And new companies are more likely to be at the frontier of productivity growth.

New businesses are of course likely to be small, at least initially. Confining preferential tax breaks to new businesses – for example, by prescribing that a lower tax rate is only available to a business for the first (say) three years after its incorporation – focuses the assistance on those businesses which are actually likely to innovate, and to create jobs. This is instead of dissipating it on the much larger number of businesses who have no desire, intention or ability to do either.

Preferentially taxing new businesses is therefore much more likely to achieve the stated goals of boosting jobs and growth, and of encouraging innovation, at much lower cost.

In addition to this, preferentially taxing new businesses avoids the perverse incentives that inevitably arise when the eligibility for some form of preferential treatment is determined by a business’ size. This is frequently demonstrated by the reluctance of businesses to put on an extra worker when doing so would render them liable to pay state payroll tax.

Of course, there would need to be compliance measures designed to forestall “rebirthing” of companies in order to prolong access to tax preferences intended to benefit new companies, but that would not be difficult to provide.

The Coalition’s support for a preferential tax rate for small businesses appears to owe more to its long-standing, almost religious, belief that there is something inherently more noble or worthy about owning and operating a small business, than there is about managing or working for a large one (or a government agency). Also that this belief should be reflected in the tax system, rather than basing it on any evidence that taxing small businesses at a lower rate than large ones will have any positive impact on economic or employment growth.

Why Labor and the Greens should support this view is much more of a mystery.

Author: Saul Eslake, ice-Chancellor’s Fellow, University of Tasmania

After all the talk, what is the Turnbull government actually doing for small business?

From The Conversation.

Treasurer Scott Morrison continues to warn about the decline of Australia’s global competitiveness if the centrepiece of the 2016–17 federal budget – a company tax rate cut – is not passed.

However, such tax cuts are not necessarily the best approach for the government to support small business. They need other – more immediate – forms of support, our research shows.

What’s being proposed?

The 2016-17 budget reflected the Turnbull government’s catchphrase of “jobs and growth”. From a small-business perspective, the budget wanted to:

… boost new investment, create and support jobs and increase real wages, starting with tax cuts for small and medium-sized enterprises, that will permanently increase the size of the economy by just over 1% in the long term.

In 2014, Australia had the fifth-highest company tax rate among OECD countries, albeit average in the Asia-Pacific region. Local investors benefit from lower taxes on dividends through Australia’s dividend imputation system, which passes credits onto them for corporate taxes already paid.

The Abbott government later succeeded in lowering the tax rate for small businesses with a turnover of less than A$2 million from 30% to 28.5%. The Turnbull government’s plan would eventually reduce the rate for all companies to 25% by 2026-27. It’s a phased implementation over the next ten years, starting with an immediate cut for small companies to 27.5%.

However, 70% of small businesses are unincorporated. This means their owners add profits to their personal income for tax purposes. While the government has promised an increase in their tax offset percentage, it plans to retain the cap of A$1,000.

All small businesses will benefit from the simplification of tax rules for stock, GST and depreciation. But the government’s plan introduces three levels of concessions for small businesses. This complicates the definition of what these small businesses are.

Definition disputes

Defining small business goes beyond an academic debate.

With little consensus on typical turnover numbers – these range from A$2 million to A$25 million – a better indicator could be the Australian Bureau of Statistics definition of small businesses as those with fewer than 20 employees. And 97% of the 2.1 million businesses trading in Australia fit this definition.

It is risky, though, to simplify the definition into one blunt instrument that ignores differences in industry, life cycle and high-volume versus high-worth sales. A more nuanced approach is needed to ensure relief for the businesses that need it most.

However, the major political parties seemingly remain focused on turnover as a measure of what is and isn’t a small business. The government’s plan extends the upper limit for the turnover of small businesses to A$10 million by 2016–17, which covers some of the 3% of Australia’s non-small businesses.

Meanwhile, Labor has argued for immediate support for tax cuts to small businesses with a turnover of less than A$2 million.

Lifting the turnover threshold for all small businesses from A$2 million to A$10 million in the short term will increase the number of businesses that can access some tax concessions by 90,000. And it may improve economic growth as larger firms receive some relief.

What small businesses actually need

Small businesses need immediate and certain tax relief in the short term. They struggle with an uncertain business environment.

But, in the longer term, our research shows increased competition, a lack of market demand and red tape are but a few of the issues small businesses deal with. They highlighted statutory and regulatory compliance, as well as tax planning and compliance, as major issues for them.

More than tax rates, complex tax requirements and regulations are issues causing small businesses substantial distress. The Australian Tax Office’s research supports this: more than 70% of surveyed clients viewed their tax affairs as complex. And the World Bank’s ease of doing business index ranks Australia 25th in terms of ease of paying taxes.

The immediate tax relief for small businesses is tied up in proposed legislation surrounding the government’s ten-year tax plan, which is unlikely to find enough support to pass the parliament in its current form. The uncertainty and complexity that have ensued from the political conflict over tax have negative effects on the small business landscape.

Innovation is likely to suffer under such uncertain conditions. The government’s plan recognises that:

Small businesses are the home of Australian enterprise and opportunity and they are where many big ideas begin.

In addition to ideas and passion, small businesses need resource availability, appropriate capabilities and market access to innovate. The plan proposes measures that satisfy some of these criteria, but more focus on finding ways to minimise bureaucracy to provide time to focus on innovation is needed.

The role of government is undeniable in such initiatives. Even if one argues that tax relief is a temporary reprieve, this cash injection can jump-start small business innovation and growth.

Should the two major parties fail to find common ground on the government’s company tax cut, the stalemate will continue – and leave small businesses in the lurch.

Authors: Martie-Louise Verreynn, Associate Professor in Innovation, The University of Queensland; Thea Voogt, Lecturer in Tax Law, The University of Queensland.

 

ABA Responds To SME Banking Report

The ABA has responded to the Kate Carnell SME Banking Review, and rightly highlights the importance of the SME sector to the economic future of Australia.  They said they would respond to the findings in the report later.

Of course, talk is cheap, but if it leads to real change that benefits small business it would be a good outcome.

Among the items I think they need to address are:

  1. High prices for loans to SME’s – rates have not fallen in line with cuts in the RBA cash rate
  2. Insistence on SME’s providing collateral even for relatively small loan amounts, and the fees involved in these transactions
  3. Heavy handed dealing with small business owners who get into difficulty, not just in the agricultural sector
  4. Lack of transparency in loan agreements

This is what the ABA has said:

The Australian Bankers’ Association has welcomed the report into small business lending practices released today by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP.

“Small businesses drive economic growth and jobs, and having access to finance is key to their success,” ABA Chief Economist Tony Pearson said.

“Banks have heard the problems raised by small businesses and farmers and are focused on making banking better for them.

“This includes being more transparent and flexible in loan arrangements, and setting new standards on appointing receivers and valuation practices.

“The ABA is also working with small business organisations to make sure they have the information they need to manage and grow their businesses, including revamping the existing Financing Your Small Business website,” he said.

“The issues raised by Australian Small Business and Family Enterprise Ombudsman Kate Carnell in this report are important. Alongside this, the Code of Banking Practice is currently being independently reviewed (Khoury Review).

“We expect the report of the Khoury Review to be published shortly, and we aim to respond to the recommendations, as well as those from the Carnell Review, by the end of this month.

“The ABA will make changes to the Code to make sure our commitments to small businesses are clearer. We’re looking at having a separate section for small business lending and how we can improve the transparency of loan terms and conditions.”

Mr Pearson said the industry supported giving more help to customers when things go wrong.

“The ABA supports simplifying the current external dispute resolution system, creating an easier ‘one-stop-shop’ model and expanding the scheme so more small businesses can have complaints heard without needing to use the courts.

“At the same time, banks are improving their own complaints handling processes and appointing new dedicated customer advocates. Six banks have already appointed their customer advocate, with the other banks committed to have theirs in place by April,” he said.

“The ABA is pleased the report recommends a national approach to farm debt mediation. We have been advocating for some time to have a nationally consistent and mandatory approach to mediation that helps farmers in financial difficulty, which is modelled on the existing NSW and Victorian schemes.

“This would make it simpler and fairer for farmers to get help when they need it most,” Mr Pearson said.

This week Australia’s leading banks launched a Better Banking program to deliver better products and services to customers, building on last year’s reforms that address concerns with the culture in banks.

Former Auditor-General, Mr Ian McPhee AO PSM, is overseeing the implementation of some of these reforms in his role as independent expert. He has been providing detailed quarterly reports to the public on where the industry is up to, including how individual banks are progressing.

“The ABA recognises the importance of customers and stakeholders having confidence in the changes the industry is making. We will ask for more detailed information in the next report about individual banks’ progress,” Mr Pearson said.

 

Change is Overdue and the Banks are on Notice

From the BankDoctor.

This is the confronting title of a report into the adequacy of the law and practices governing financial lending to small businesses released today by Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman. By way of background, in September 2016, the Minister for Small Business Michael McCormack asked the ASBFEO to undertake this inquiry which involved public hearings with executives from the four major banks and it also heard evidence from bank customers.

REPORT RECOMMENDATIONS
The report makes 15 recommendations designed to address gaps in the existing regulatory environment and with the practices of industry participants. These recommendations relate to businesses which borrow less than $5m.

What do these recommendations actually mean for small business borrowers, how will the banks respond and will anything change anyway? Here’s theBankDoctor’s take …..

More Breathing Space and Protection.
Banks would be required to:

  • Remove any loan conditions which allow banks to unilaterally trigger a default based on revaluing assets during the life of the loan and invoking financial covenants or catch-all ‘material adverse change’ clauses. That is, as long as the borrower is meeting repayments and is acting lawfully, the bank can’t trigger a default.
  • Provide a minimum 30-business day notice period to all changes to loan conditions and covenants.
  • Provide borrowers with decisions on roll over at least 90 business days before loans mature.

Greater Understanding & Transparency.
Banks would be required to:

  • Put in place a new small business standard form contract that is short and written in plain English.
  • Provide a one-page summary of the clauses and covenants that may trigger a default or other detrimental outcomes for borrowers.
  • Provide borrowers with a choice of valuer, a copy of the instructions and the valuation report. And borrowers would be provided with a copy of any instruction given to investigating accountants as well as the subsequent report;

Better Dispute Resolution Procedures.

  • The banking industry must fund an external dispute resolution one-stop-shop with a dedicated small business unit that has appropriate expertise to resolve disputes relating to a credit facility limit of up to $5 million.
  • Banks must establish a customer advocate to consider small business complaints and disputes that may or may not have been subject to internal dispute resolution.
  • External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigating accountants and receivers.

ONE SIGNIFICANT OMISSION
It was a little surprising not to see any reference to the critical issue of open access to client data. More needs to be done to ensure banks provide open access to customer data so that borrowers can use their data to get the best deal possible and they are able to change banks more easily. To date the banks have been, at best, cautious and, at worst, uncooperative in addressing this issue. The slower the banks are to respond to customer expectation the more difficult it will be to hold onto them. We used to talk about banks “owning” customers but this is changing. Failing to embrace open access to data will not help banks retain customers in the longer term.

HOW WILL THE BANKS RESPOND?
The banks have responded to the constant adverse public exposure by conducting their own reviews and marketing campaigns. Only last week the Australian Bankers Association on behalf of the banks announced a raft of commitments to make banking better under the heading of “we hear you”.

These newly announced initiatives include:

  • A renewed commitment to support customers in financial difficulty.
  • Providing more support to small businesses and farmers by introducing new best practice standards on valuation practices and how banks appoint receivers.
  • Developing financial literacy resources and tools for small businesses.
  • Helping customers better understand how they can switch accounts.

To their credit, the banks are at least saying the right things, they get that the loss of trust is a major issue which threatens their livelihoods especially as new, more flexible and user friendly alternatives are becoming more accessible. But will they actually follow through and how long is this all going to take? And who is going to hold them accountable?

ACCOUNTABILITY & FOLLOW UP.
Kate Carnell will do all in her power to hold the banks to account.

“Frankly, the banks take ‘kicking the can down the road’ to new levels.  This is no longer acceptable and I’m determined the recommendations we’ve made are adopted as quickly as possible.  This report is a living document; it’s only the beginning of our work in this area,” she said.

She didn’t hold back when she added that “the banks have consistently failed to implement changes to address persistent problems”.

To ensure accountability the ASBFEO will publish six monthly scorecards on the progress banks are making in response to the recommendations contained in the report.

The report also recommends the ABA’s undertakings are carried out by requiring the publishing of individual bank implementation plans including key milestones and deliverables with outcomes against these plans.

A Royal Commission would take years to lead to change in our banking system. Last year’s Parliamentary Inquiry provided good reality TV entertainment as a diverse group of politicians prosecuted their own agendas against the defensive and well scripted bank CEOs.  But the ASBFEO inquiry, this report and its on-going engagement with bank leaders represents the best chance yet to drive much needed change in bank practices in the SME sector.

Yes, SME’s ARE Getting The Damp End of the Stick from the Banks

An inquiry into small business loans by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell, has found the big four banks consistently engage in practices that have caused significant harm to some small business customers. The ASBFEO inquiry investigated a selection of cases examined as part of the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans.

This report confirms what our SME surveys show – small business has an unequal relationship with their banks, have difficulty getting the finance they need on fair terms, and find that lenders bully them especially in times of hardship. That said, SME’s often are unable or unwilling to shop around to get better deals, and feel trapped by the current arrangements. You can a video on our analysis here, and get the free copy of the DFA report here. SME’s are a critical engine in the economy, and current banking behaviour towards them is a brake on growth.

The ASBFEO report has made a significant number of recommendations.

  • Strengthen the Australian Bankers’ Association’s six-point plan;
  • Code of Banking Practice be revised to include a specific small business section, with the Code to be approved and administered by ASIC;
  • No defaults on loans below $5 million where a small business has made payments and acted lawfully;
  • A minimum 30-business day notice period for potential breach of contract conditions;
  • A minimum 90-business day notice period for bank rollover decisions for loans below $5 million (longer for rural properties and complex businesses);
  • Banks required to provide a one-page summary of loan default triggers;
  • Banks to put in place a new and clearly written small business standard form contract;
  • Borrowers be provided with a choice of valuer, vauler instructions and valuation report;
  • Borrowers be provided a copy of instructions given to investigating accountants and the subsequent report;
  • Banks to eliminate perceived conflict of interest when investigating accountants appointed as receivers;
  • An industry-funded one-stop external dispute resolution body, with a unit dedicated to resolving small business disputes regarding credit facilities of up to $5 million;
  • Bank customer advocates be made available to consider small business complaints;
  • External disputes resolution schemes be extended to include disputes with third parties appointed by the bank and to borrowers who have undertaken farm debt mediation.
  • A national approach to farm debt mediation;
  • ASIC to establish a Small Business Commissioner.

The ASBFEO inquiry – completed in just over three months – investigated the circumstances surrounding a number of cases of alleged small business mistreatment by the banks, and concluded loan contract arrangements between banks and small businesses, put the borrower at a distinct disadvantage.

“Fundamentally, what we’ve found is that small businesses who take out a loan, do so under the impression that if they keep up their payments, they will stay out of trouble.  The reality is that this is not the case; that the clauses contained in standard small business loan contracts give banks an inordinate level of power over the borrower, who has zero ability to do anything about it,” Ms Carnell said.

“Basically, the terms in these contracts allow the bank to take action to protect itself from financial risk, by inflicting added demands on the borrower.

“For example, banks may conduct a new valuation on the assets securing the loan.  Now if the value is found to have fallen, the borrower faces significantly increased – and potentially unmanageable – loan costs.  Banks also have the power to unexpectedly call in the loan, and demand repayment in an unrealistic timeframe.

“So what ends up happening is that through no fault of their own, small businesses could quickly find themselves in default, even though they’ve made each loan payment, on time, every time.

“The banks argue that they don’t use these contract clauses, however our inquiry found this is simply not true; that banks do in fact utilise these clauses, much to the surprise and heart-break of their small business borrowers,” she said.

Ms Carnell said the ASBFEO report outlines recommendations that can be implemented – many in a short timeframe – to help alleviate the vulnerability of small business borrowers when entering contracts, while not impacting on the financial viability of the banks.

“The cases we examined during our inquiry highlighted the glaring need to ensure small business bank customers are provided with simple standard contracts that are written in plain English and that get rid of the clauses giving banks all the power,” Ms Carnell said.

“It’s also clear from the cases we looked at, that current thresholds governing small business external dispute resolution are insufficient, so we will certainly support work in establishing a mechanism to provide timely and affordable access to justice for cash-strapped small businesses,” she said.

Ms Carnell said the ASBFEO will publish six monthly scorecards on the progress banks are making in response to the recommendations contained in the ASBFEO report.

“Since the GFC there have been 17 inquiries and reviews that have produced more than 40 recommendations over the years, relating to the small business sector.  Despite this, the banks have consistently failed to implement changes to address persistent problems” Ms Carnell said.

“Frankly, the banks take ‘kicking the can down the road’ to new levels.  This is no longer acceptable and I’m determined the recommendations we’ve made are adopted as quickly as possible.  This report is a living document; it’s only the beginning of our work in this area,” she said.

Ms Carnell said she hopes that as industry leaders, the four major banks will seize the opportunity to be exemplars for change, saying the ASBFEO has already secured varying levels of in–principle support from the banks on a range of issues.

“While there’s certainly a lot of work to be done, it’s important to give credit where it’s due, with the big four banks committing – albeit to varying degrees – to make changes in a number of problem areas identified during our inquiry process,” Ms Carnell said.

These include amending the Code of Banking Practice to provide greater small business protections, the creation of customer advocates and improved transparency on valuations.

Background:

On 6 September 2016, the Minister for Small Business, the Hon. Michael McCormack MP, tasked the ASBFEO with undertaking an inquiry into the adequacy of the law and practices governing financial lending to small businesses.

The ASBFEO inquiry investigated a selection of cases examined as part of the Parliamentary Joint Committee Inquiry into the Impairment of Customer Loans.

Throughout the inquiry process executives from the four major banks were summonsed to attend public hearings, with the ASBFEO using its Royal Commission-like powers to compel banks to produce required case documentation.  The inquiry also heard evidence from bank customers during private hearings, and considered the findings of previous inquiries and reviews.

The Financing of Nonemployer Firms

From The St. Louis Fed Blog.

Nonemployer firms that applied for financing were more likely to operate at a loss, according to the recently released 2015 Small Business Credit Survey: Report on Nonemployer Firms.

This report, produced jointly by the Federal Reserve banks of St. Louis, Atlanta, Boston, Cleveland, New York, Philadelphia and Richmond, examined trends in businesses with no employees other than the owners. As the report noted, these businesses make up nearly 80 percent of all U.S. firms.

Applying for Financing

The report noted that 32 percent of survey respondents said they applied for financing in the previous 12 months. Among those who applied, the most common reason (66 percent) was to expand the business or to take advantage of a new opportunity. The next most common reason (38 percent) was to cover operating expenses. (Respondents could select multiple answers.)

Among those businesses that did not apply for financing, the top three reasons were:

  • Debt aversion (33 percent)
  • Already had sufficient financing (30 percent)
  • Believed they would be turned down (25 percent)

Profitability: Applicants vs. Nonapplicants

As the report noted: “Collectively, applicants were less profitable than the nonapplicants.” The figure below shows the difference.

profitability of small businesses that applied for financing

Financing Approval

Among firms that applied for financing, 41 percent were not approved for any of the funding they sought. The percentages of firms not receiving any funding grew smaller as firms grew larger: 48 percent of firms with less than $25,000 in revenue did not receive any funding, while only 28 percent of firms with revenues greater than $100,000 did not receive funding.

About 71 percent of firms received less financing than the amount sought. When asked about the primary impact of this financing shortfall, the top response (33 percent) said the firm had to delay expansion. Other top answers were that they used personal funds (22 percent), were unable to meet expenses (18 percent) and passed on business opportunities (13 percent).

Additional Resources

Micro firms make highest business complaints to ACCC

The Australian Competition and Consumer Commission’s latest ACCC Small Business in Focus Report reveals that micro and small businesses made 7,000 complaints and enquiries from July 1 to December 31 2016.

 

“Over 60 per cent of business contacts were from micro enterprises of four or under employees, which isn’t surprising given that micro firms are the biggest group of businesses in Australia,” ACCC Acting Chair Dr Michael Schaper said.

“In the past six months, the SME sector has been particularly concerned about misleading conduct and false representations with 735 complaints, consumer guarantees issues with 329 complaints, followed by misuse of market power concerns with 95 complaints.”

“Fewer franchisees have been reporting issues to the ACCC since the introduction of the new Franchising Code in January 2015. After an initial spike averaging 52 franchising complaints in the first six months of 2015, complaints have fallen to 32 a month by the end of 2016,” Dr Schaper said.

“The ACCC received 185 complaints from small businesses in the agriculture sector, a substantial increase from the previous six months. In the July to December period, the cattle and beef market study interim report was released, our dairy inquiry began, we conducted the first round of audits of signatories to the Food and Grocery Code, and our report into the horticulture and viticulture sectors was also published.”

Other key developments in the past six months:

  • Unfair contract terms provisions were extended to small business standard form contracts on 12 November 2016. We received 81 contacts about B2B UCT issues.
  • $1.395 million was reported lost by the small businesses to scams, down from $1.606 million in the previous six months
  • The ACCC took action against ABG Pages for alleged breaches of the Australian Consumer Law in its dealings with small businesses
  • The ACCC took action against Morild Pty Ltd for alleged breaches of the Franchising Code

“This year, we expect that the ban on excessive payment surcharging for all businesses on September 1 will generate significant interest from the business community. We have prepared advice for small business on the new credit card surcharging laws, which I hope all businesses will consult,” Dr Schaper said.

“We will also be releasing draft findings of our market study into the new car retailing industry mid-year, a matter of interest to many small businesses who operate in the industry or rely on new cars for their work. Businesses will have an opportunity to make a submission on the draft findings when it becomes available.”

 

 

Are Small Business Bearing Some Of The Bank’s Interest Rate Risk?

An interesting working paper from the IMF was released today. Why Do Bank-Dependent Firms Bear Interest-Rate Risk? looks at the link between bank funding, floating rates and how this is transmitted to firms who borrow on variable rate terms. The paper concludes that banks do indeed transfer interest rate risks to firms, and this is especially so when banking regulation tightens.

Here is the summary:

I document that floating-rate loans from banks (particularly important for bank-dependent firms) drive most variation in firms’ exposure to interest rates. I argue that banks lend to firms at floating rates because they themselves have floating-rate liabilities, supporting this with three key findings. Banks with more floating-rate liabilities, first, make more floating-rate loans, second, hold more floating-rate securities, and third, quote lower prices for floating-rate loans. My results establish an important link between intermediaries’ funding structure and the types of contracts used by non-financial firms. They also highlight a role for banks in the balance-sheet channel of monetary policy.

Here is the full conclusion from the report:

Bank lending is in large part funded with floating-rate deposits. As hedging is costly, banks avoid mismatch with the interest-rate exposure of their liabilities, in part, by making floating-rate loans to firms. To establish this link between the structure of bank liabilities and the floating-rate nature of bank lending, I examine the cross section of banks. Banks with greater interest rate pass-through on their deposits hold more floating-rate assets: both loans and securities. In the cross section, these floating fractions are positively correlated with each other. I show that if banks were responding to demand for floating-rate debt from firms instead of their own liabilities, this correlation would be negative.

Moreover, while banks with more deposit pass-through hold more floating-rate loans, they quote lower interest rates for ARMs relative to FRMs. The combination of higher quantities and lower prices points to variation in supply rather than demand. I also present time series and historical evidence supporting the supply-driven view of floating-rate bank lending to firms.

This paper therefore highlights an important consequence of banks’ short-term funding: the potential for interest-rate mismatch. While standard models do analyze maturity mismatch created by short-term funding, they typically do not consider uncertainty in interest rates and interest-rate mismatch.

This paper shows that the structure of banks’ funding has important implications for the choices banks make about interest-rate risk on the asset side of their balance sheets. More broadly, my results establish an important link between intermediaries’ funding structure and the types of contracts used by non-financial firms. My results suggest that tighter regulation of banks’ exposure to interest rates might lead banks to pass on more risk to firms, which is particularly relevant given renewed regulatory focus on banks’ exposure to rates.

Bank-dependent firms, i.e. poorly rated firms and smaller firms, are more exposed to interest rates than firms with better access to capital markets. While these firms do use interest-rate derivatives to hedge this exposure, they do so only partially. I show that this exposure is a component of the Bernanke & Gertler (1995) balance-sheet channel of transmission of monetary policy. Banks therefore play a role in the transmission of monetary policy to firms beyond the usual bank lending channel; here the effect is based on existing rather than new bank lending.

Note: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Innovative platform to help kickstart SMEs

Suncorp says it is making it easier to start a business in 2017 with the launch of Suncorp Start Company.

Suncorp Start Company, a new online platform, brings together a diverse range of services and solutions to create a user-friendly guide for aspiring entrepreneurs.

Suncorp Customer Platforms Chief Executive Officer Gary Dransfield said the website connects customers with resources like legal and accountancy documents, business name registration forms and website development tools, which are essential to starting a business.

“It also provides access to educational tutorials, tips and plans to help recently established and trading businesses to take the next step,” Mr Dransfield said.

“Our research tells us that small businesses want to spend more time on building their business, not completing paperwork – early access to the right tools and information can set them up for faster success.

“With Suncorp Start Company we consolidated solutions from our partner companies and insights from customer feedback to develop a product which solves problems and helps to meet their needs.”

The new platform follows Suncorp’s partnership with 9 Spokes to bring to the market ‘Suncorp Business Toolbox’ – a business dashboard that enables customers to gain insights across their business.

“We know small businesses are busy. Suncorp is committed to making it easier for them to achieve their financial goals through solutions and services which are easily available as part of our new Marketplace strategy,” Mr Dransfield said.