Capital injection: Morrison commits $100 million to SME growth

Small businesses looking to turbocharge their growth will have access to a $1 billion capital fund under a re-elected Morrison government.

With the 2019 federal election only weeks away, Prime Minister Scott Morrison has unveiled his latest pitch to SMEs, pledging to create 250,000 new (net) small businesses over five years if voters return the coalition to power.

Under the policy announced today, the government would team up with banks and superannuation funds to create an Australian Business Growth Fund, which would take out investments in high-potential businesses.

“They’re the ones who pay Australia’s wages and that’s why we need to back them with lower taxes and greater support to see their businesses grow and prosper,” Morrison told ABC News Breakfast from Adelaide on Tuesday.

The commitment builds on a $2 billion securitisation fund recently legislated by the government, although the predominately private growth vehicle announced today would provide equity, not debt.

Capital injection needed

SMEs with an annual turnover between $2 million and $50 million will be eligible for the fund, with shareholdings capped at 40% to ensure businesses retain control.

An independent board and chair appointed by shareholders would administer the scheme.

A similar fund already exists in the UK, of which small business ombudsman Kate Carnell has been a supporter, with her office releasing a research paper on SME funding solutions last year.

Carnell tells SmartCompany about 30-50 high-growth-potential SMEs will benefit from the fund each year.

“What we’ve found is those small-to-medium-sized businesses with high growth potential often need capital injections that are higher than is the case for startups,” Carnell says.

“Banks aren’t very keen on lending against cashflow or bricks-and-mortar these days.”

“This is about companies that are growing very quickly,” Carnell says.

Treasury started consultation on an Australian Growth fund last December, meeting with stakeholders in Canberra, including the Australian Prudential Regulation Authority (APRA), which needs to adjust lending rules for the fund to be viable.

The regulator has indicated in-principle support for the growth fund in the past but has yet to confirm its official position.

National Australia Bank has already announced support for the initiative, while Commonwealth Bank and HSBC are also understood to be in favour.

Asked during a press conference on Tuesday whether he’ll be able to get the banks on board, Morrison said he was confident.

“As time progresses I’m sure they’ll see the wisdom of what has been a very successful initiative, particularly in other jurisdictions,” he said.

Morrison’s small business creation pledge takes into account the coalition’s other small business policies, including tax cuts and a boost to the instant asset write-off.

Morrison claimed a total 230,000 small businesses — defined as those with fewer than 20 workers or less than $10 million in annual turnover — had been created over the last five years on Tuesday.

Startups missing?

Startups didn’t merit much specific mention in coalition communication about the policy on Tuesday morning, setting a similar tone to the recent federal budget and Treasury consultation on employee share schemes.

Rachel Yang, investment manager at VC firm Giant Leap Fund, said while the government may not want to discuss it, the fund could be used to support pre-seed stage startups.

“This group is the most affected by the recent cuts to the R&D tax incentive and could use the funds to gain further traction in order to be better prepared to seek investment from angel investors and VCs,” she said.

“It is strange that the government refuses to acknowledge startups and the creation of new businesses in what should be a policy focused on driving innovation and future employment.

“We should be embracing technology to ensure we don’t get left behind rather than treating innovation as a dirty word,” Yang said.

The UK’s £2.5 billion ($4.55 billion) growth fund has invested in more than 280 SMEs since its creation in 2011, a number that includes both startups and established businesses.

There’s a broad mix of funding recipients in the UK scheme, including emerging technology platforms and family-owned businesses trading for more than a decade.

Under the growth fund model pitched by the ombudsman last year, loans between $250,000 and $5 million would be available on seven-year terms, secured against individual businesses.

Startup policy by stealth

Rebecca Schot-Guppy, general manager of FinTech Australia, says the fund is “startup policy by stealth”.

“The turnover and headcount criteria outlined specifically target early-stage growth companies,” she says.

“While the stereotypical image of a startup founder is in their 20s and child-free, that is not the norm. 

“Fintech founders are typically in their 40s, many have young children and are using their family support to start their businesses.

“Whether that is through using their family home as equity for a loan or actually working within the business,” Schot-Guppy says.

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