The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has released its final report. While the scope of the report was broad, covering everything from consumer lending, to superannuation, to financial advice, it was of special interest to Australian businesses attempting to improve their access to financing.
Due partly to the Royal Commission itself, major banks began to act significantly more conservative in 2018, with traditional financing becoming difficult for businesses to access. Because of this, alternative finance such as invoice finance and supply chain finance has become increasingly important to help businesses manage their everyday financing needs, as well as to help drive growth.
Lending is becoming more difficult for businesses to access
As the Royal Commission began to uncover problems in the lending policies of various institutions early in 2018, banks have appeared to become more risk-averse. As a result, loans growth slowed noticeably in 2018, impacting the ability of businesses to access the financing they need to drive growth. This lending slowdown has most directly hit the real estate industry, further compounding financing difficulties for small businesses in particular.
The real estate downturn is hurting small businesses
Many small businesses rely on private loans secured against the homes of their owners, which means reduced home values can translate to reduced borrowing capacities. In recent months, real estate prices in major Australian cities have begun to sag, putting business owners who use their real estate as security in a difficult position.
The Royal Commission directly examined small business lending practices in its third round of hearings but concluded that rule changes would not be beneficial.
Rule changes are not recommended for SME lending
While Commissioner Hayne had some strong words for the banking industry, he explicitly did not recommend changes for the rules and practises surrounding SME lending. Specifically, that means consumer credit laws won’t be extended to cover businesses under the NCCP, loan guarantees will not be restricted, and lenders will not be obligated to renew loans.
While critics pushed for increased regulation in all of these cases to protect businesses, the commission expects that all of these changes would only result in even more limited access to financing for businesses. Instead, they expect both small and larger business lending to bounce back on its own. Businesses, for their part, need to find solutions to manage their more limited access to funds in the meantime. More importantly, they need tools that ensure that similar issues won’t be able to jeopardise their success in the future.
Using invoice finance and supply chain finance to manage cash flow
In order to maintain their growth, and to manage everyday cash flow interruptions, businesses need ready access to funds. Waiting for their primary lending institutions to become more comfortable with lending again, or for the real estate market to recover in the case of smaller businesses, is not an option. Business happens in real time, and businesses need cash flow management tools that can keep up.
Invoice finance is a way to get an advance on revenues
Instead of waiting for revenues to trickle in, or for a potentially poorly received loan application to be approved, invoice finance allows businesses to get the cash they need literally overnight. They simply exchange an outstanding invoice for most of its value up front, at an alternative financial institution such as Fifo Capital. The financial institution will then collect the payment on its own, before issuing the remaining funds, minus their fee. Unlike a loan, invoice financing is credit free, and the initial payment can often be made in a matter of hours.
Supply chain finance ensures timely supplier payment
Another great way to come up with additional funds is to use supply chain finance. This works by allowing businesses to pay their suppliers through an off-balance sheet facility. The business then simply pays back the balance when funds come in, potentially deferring payments up to 90 days. What makes this concept so useful is that Fifo Capital works directly with clients to take a full 360-degree look at their businesses in order to determine the appropriate size of this fund. This dispenses with a time-consuming overreliance on credit profiles and allows them to scale funding for both small and large enterprises.
A business’ future shouldn’t be put at risk simply because of their primary banking institution’s changing appetite for risk. By making use of these tools, and others like them, businesses can make sure that they have the cash flow they need to keep operations and growth activities running smoothly.