RBA first small business finance roundtable finds SMEs hit hardest by financial crisis

The Reserve Bank hosted its first small business finance roundtable on Tuesday, with the aim of better understanding how the small business sector is financed and where there might be information gaps.

The RBA hosts an annual panel with 10 small business owners, but the roundtable was a first for the bank as it involved “both sides of the fence”, small business owners, small business organisations, the major banks and academics.

The RBA would not divulge the names of the people or organisations that attended, but said the roundtable identified that small business was hit harder than large companies by the financial crisis.

“Smaller businesses typically access funding on less favourable terms than larger businesses,” the RBA said in a discussion paper published following the roundtable.

“The reasons mostly relate to their size, in that smaller businesses’ revenue streams are more volatile, increasing the riskiness of these loans to lenders.

“The costs associated with raising debt directly from capital markets are also relatively high for smaller businesses.

“Size issues are less relevant for equity funding. Equity is typically raised internally through profits from the owner, or from friends and family.”

The RBA found that small businesses tend to have lower survival rates and more volatile revenues than larger firms and found economic conditions over recent years had been more challenging for small business than large firms, partly reflecting differences in the industries in which they operate.

“Small businesses’ greater reliance on intermediated debt means that tighter lending standards have a greater impact on small businesses and the reassessment of risk more generally by banks has also disproportionately affected small companies,” the RBA said.

“Small businesses are also less able to withstand the cashflow impact from a reported lengthening of payment terms by many larger companies over recent years.

“This would have the potential to hamper smaller firms’ investment, bids for tenders and cashflow management.”

The roundtable also called for an agreed definition for small business and found the Australian Bureau of Statistics defined a small business as employing fewer than 20 employees while the Australian Taxation Office definition of a small business as having less than $2 million in revenue.

“Achieving a uniform, precise and relevant definition may help provide a clearer picture of small businesses’ contribution to various aspects of economic activity, as well as conditions and challenges faced by the sector,” said the RBA.

“In relation to financing, a uniform definition could assist analysis of issues such as access to finance, interest rates faced by small business borrowers, lenders’ loan-to-valuation standards, and financial institutions’ aggregate exposure to the small business sector.”

Peter Strong, executive director of the Council of Small Business Australia, told SmartCompany he was one of the attendees at the roundtable.

“The fact that [the RBA] held it was fantastic, they saw the issue and brought a very good group of people together,” says Strong.

“It was obvious that they know there are things they need to know about the small business community.

“One of the big issues for them was the definition of small business, it is very hard to get one consistent definition, but the one consistent thing is that we are people.”

Strong says five or six banks attended the roundtable and all were “very keen” to get a system for funding small business that works.

This story first appeared on SmartCompany.