IPA calls for a state-backed loan guarantee as SMEs struggle to get finance

Approximately 28,000 Australian small businesses are currently facing dire financial constraints and as many as 300,000 small businesses nominate finance issues as a significant concern, according to research published yesterday by the Institute of Public Accountants and Deakin University.

It is one of the key reasons why the IPA is calling for Australian governments to establish a state-backed loan guarantee scheme for small businesses.

The push for the scheme, versions of which already exist in most other developed nations, forms one of the recommendations of the IPA’s Small Business White Paper, launched at Parliament House in Canberra yesterday.

The paper also contains recommendations for tax reform, support for the introduction of an effects test in competition policy and recommendations for how Australian governments can better support innovative small businesses.

Andrew Conway, IPA chief executive and co-author of the report, told SmartCompany this morning he is encouraged by the interest he has received so far in the loan guarantee proposal.

He said politicians from both major parties showed interest in the scheme yesterday and crossbench senators have asked for a more detailed briefing on how such a scheme would work.

“We’ve had really encouraging discussions with politicians from all sides … momentum is building,” Conway says.

Conway describes the scheme as a way for the federal government to “take on a slice of the risk” for small business-lending, which remains a barrier to Australian businesses growing.

Under a pilot scheme recommended by the IPA, the government would provide guarantee loans for small businesses investing in capital projects, with the loans to be capped at $100,000. The loans would be for a maximum term of five years, have a government guarantee level of 65% and an interest premium for the government of 3.5% above the bank’s retail rate.

The IPA also recommends piloting a loan guarantee scheme for small businesses investing in international market development, capped at $200,000 per loan. In this instance the loans would be for a maximum of 10 years, have a guarantee level of 75% and the government could add an interest premium of 2.5% above the bank’s retail loan rate.

If successful, Conway says the schemes could then be extrapolated into other sectors.

Conway says Australia stands alone among developed economies as a country without a state-backed loan guarantee scheme for small businesses and the evidence from other economies, including in the US, the UK and Canada, is these schemes help small businesses grow.

The US has had a loan guarantee scheme since the 1950s, while UK governments have provided guarantees on small business loans since the 1980s. The UK scheme was extended to cover businesses of all sizes in 2009 to help mitigate the effects of the Global Financial Crisis.

“The scheme works and is not necessarily a major economic cost to the government,” Conway says.

“The government still gets a premium on the interest and there is a long-term return for the economy by helping these businesses get off the ground.”

Conway says given such large numbers of small businesses face difficulty accessing finance, even helping 1000 small businesses fund their growth would have a substantial impact on employment.

“The issues around access to finance are multifaceted,” Conway says.

“From the process small businesses have to go through to the risk appetite of the banks.”

“Australia is the only country out of 46 developed countries not to have a loan guarantee … we should be looking to go down that path.”

Conway says small business “holds the key” when it comes to unlocking growth in the Australian economy and he urges governments to also “think boldly about small business tax cuts” that would allow SMEs to re-invest in their businesses.

“Our view is the small business reforms in the budget are very welcome but more can be done,” he says.

Conway says the federal government “deserves a pat on the back” for getting the budget measures through “in a really difficult fiscal environment”.

However, he says further reforms to fringe benefits tax, Division 7A rules around trust distributions and business structures, as well as an extended loss carry-back scheme and lower rates of corporate tax, would all help.