How to get business borrowing again

The tale of Australian business is currently split in two.

Today, as the ‘Big Australian’, BHP announces big writedowns, their basic business outlook is being boosted by the totally new cost structure that the board and management has introduced. And, as it happened, prices of its two main products, oil and iron ore are on the rise. BHP is fine.

But the small contractors who built the current round of mine infrastructure have been sent to the wall. Western Australia is in recession and countless families have lost their homes.

It’s the same story across the nation and what is happening to small enterprises in areas like mining contracting is exactly what has been happening for countless decades in all industries.

But finally, Australian entrepreneurial business families have revolted.

As they compare notes around the Sunday barbecues they have become risk averse.

Bank lenders currently demand small business borrowers put the family house on the line and present very tough, one-sided, non-negotiated and standardised lending contracts, which means that if a business fails or gets into trouble, the family is destroyed.

Spouses (and they can be either male or female) are refusing to allow their entrepreneurial partner to take the risks that they once did as they hear the stories of those that have lost all.

This is a worldwide problem and is one reason why low interest rates no longer stimulate economies.

Fortunately, Australia is leading the world to overcome the problem.

Like countless leaders around the world, our Prime Minister talks a lot about the innovation nation. But in Australia, with the help of Bill Shorten, the Greens and the old crossbench in the Senate, we have actually done something worthwhile to promote entrepreneurialism.

The Australian unfair contract legislation which comes into operation on November 12 will mean that many of the onerous clauses in current standardised bank overdraft agreements under $300,000 will be void and if the overdraft contract extends beyond one year then the limit will be $1 million (Unfair contract legislation a big deal, August 8).

Some banks will scream and shout, so the ACCC may be forced to haul them before the courts. But they will lose because the nation needs to enter a new era.

The cost of borrowing will rise but the security on the loans will be much less onerous. It will require a new culture among bankers and in many cases they will be replaced by small lending groups more familiar with kicking the tyres in order to rate businesses rather than relying on a house as security. This is exactly the talent the banks once had when they operated separate financing companies.

Aside from the home building and health areas, small enterprises have virtually stopped borrowing money to expand. No amount of interest rate cuts will change their minds.

The danger for employment and business prosperity in Australia is that too many of our medium-sized enterprises and many of our larger groups will fall behind in the technologies and business systems.

Economist Callam Pickering has produced two graphs, which show Australia’s problem:

 

On the right we see that business borrowing has collapsed. Many large businesses that are still investing borrow overseas so are not included in these figures. The Australian economy has been maintained by the dwelling sector but even borrowing in this sector has started to turn down.

These are dangerous times and its going take years before we can build Australian lending institutions, including peer-to-peer lending, that can assess business risks and don’t rely on the domestic house for security.

I must emphasise that such loans must carry a higher reward for the lender.

Finally, we have seen enormous investment by small, self-managed superannuation funds in commercial real estate. If business borrowing keeps falling there will be a fall in the price of commercial real estate, particularly as the computer revolution is reducing the requirement of bricks and mortar in any industries.