It’s been my experience in the past seventeen years as a business coach that there is a gap in the market for a bank that understands small business.
Banks are happy to lend while you have residential property as security, but as soon as you hit your limit, the support starts to shift. This often happens when a business hits about $3m in turnover, and then the costs of funding goes up, until the business hits about $30m.
Some banks provide invoice financing, at a significant premium to an overdraft interest rate, and this provides some breathing space for a growing business, albeit with impact on profits.
Between $3m and $30m, profitability can vary as the business scales up, implements platforms, copes with compliance, takes on non-income producing management roles, and larger premises.
The quality and experience of the bank manager when turning over less than $5m is underwhelming. Banks manage business clients statistically rather than personally, and the time taken to turn around approvals can be woefully slow. It often seems like the bank is stress-testing the small to medium sized business to see if it really needs the working capital or not.
Meanwhile, the business owner’s time and energy are consumed dealing with the bank, chasing them up, worrying about cashflow, and not sleeping. At the same time, banks are downsizing commercial banking departments, and all but CBA have failed to invest in IT sufficiently, leaving them unprepared for COVID-19 and remote working, with bankers unable to log-in to servers and print loan documents.
Businesses between $3m and $30m can be asked by the bank to undertake expensive three-way forecasts, typically by a Big 4 accounting firm, costing tens of thousands of dollars, only to discover that the business doesn’t meet the bank’s criteria, and won’t be getting the facility increase.
The rise of fintechs lending to small business at credit card rates or higher, has met a need in the market for speedy access to working capital, with default rates of only in the low single digits. Surely regular banks could step in and provide that funding at a lower cost, but they are more interested in investing in the fintechs themselves.
These are just some of the frustrations experienced by the engine room of the economy, the small to medium sized, privately owned business. Hats off to you all, you deserve every dollar you make for all the risk you take, and the stress you endure!