In the coming weeks, David Murray is due to deliver to the Abbott Government his review of Australia’s financial systems, the Financial Systems Inquiry. This inquiry will likely shape a number of significant reforms of Australia’s financial systems and frameworks, and will touch almost every Australian individual and business.
Following the release of the interim report some months ago, and the numerous leaks and media coverage, substantial debate and discussion has occurred in the mainstream media around elements such as superannuation governance, the liquidity of our major banks, and various tax elements surrounding our financial system. However, one aspect of the interim report which did not engender significant coverage, but is perhaps more relevant to The Canberra Entrepreneur than any other, is the questions raised regarding the suitability and applicability of the current system in providing the essential start-up capital and funding to small business and entrepreneurial ventures.
Talk to almost any entrepreneur or small business start-up and they will comment on the difficulty of securing financial backing and required capital through traditional sources. As Pip Morgan, Founder of Canberra-based made-to-measure tailoring business Braddon Tailors, stated when I interviewed him for this piece, the normal banks just aren’t interested in start-ups and entrepreneurs. Low interest rates and the continued growth in the housing market has meant banks can instead easily use their capital to lend in the housing market, where the risk in lending is backed by property rather than risked on a business which few tangible assets.
Talking of his own experiences is starting Braddon Tailors, Pip described the situation where bank funding is only really available through credit cards and high interest personal loans. Actual business loans, those targeted to supposedly assist businesses and with more realistic interest rates, have such extensive criteria lists that make them all-to-often unattainable. And Pip’s comments do not describe an isolated experience, but more the norm for small business ventures – especially those in non-traditional areas where banks see few tangible assets that may be repossessed should things not work out. In one of the few pieces of coverage on the issue following the release of the interim Murray Report, ABC spoke to a wide range of entrepreneurs and individuals experienced with start-ups who all sang from the same hymnbook as Pip.
Not that existing government schemes are all that much better. While governments like to highlight the schemes they have in place to assist entrepreneurs (I have indeed mentioned a number in previous pieces for this publication), their place is often limited. Sure there is value in the government putting a young start-up founder or someone with an idea together with an experiences businessman or business-focussed finance manager/accountant, but the value isn’t all encompassing – it has its place. Similarly, as remarked by a number of small-business owners and founders to this author, actual government schemes to assist start-ups and entrepreneurial ventures often aren’t all that accessible to actual start-ups. One start-up founder described how a number of government schemes have requirements in the realm of $1-2 million in turnover to qualify, not exactly small anymore.
This returns me to my central issues, the Murray Inquiry. The fact that the issue was at least highlighted in the interim report indicates it is something being actively considered by the Inquiry. Hopefully this means David Murray and his fellow panel members will have more to say on the issue in the final report. Assuming they do, we then reach the real politics of the issue.
While the final Murray Inquiry can recommend any number of changes to Australia’s financial system, action will have to be taken by either the existing players in the sector, the banks, or by the government. At least in the case of the big players, it has to be acknowledged extensive action would seem unlikely given how profitable they are under the current low-risk status quo. That leaves government and parliament.
The Abbott Government has made a significant point of stating it is pro-business, indeed on election night 2013 Prime Minister-elect Tony Abbott proclaimed Australia was once again open for business. But there is a big gulf between words and action, and this gulf only increases when talking about words and action to help the small players, not the big business groups and companies. So how likely is it that there will be some change?
The answer is…I’m not sure. Obviously much depends of what, if anything, Murray has to say of substance on the issue. There is certainly a want by both the Government and Opposition to be seen as revitalising Australia’s economy, and there are few better ways to accomplish this than by creating a positive environment for entrepreneurial risk and start-ups to blossom. But it would also require money, and possibly taking on the big banks. As any observer of the current government’s action would note, money is said to be is short supply which would seem to suggest any new schemes to help with this issue wouldn’t have huge funds behind them. A safer way for government may be to expand existing schemes, where the requirement for turnover provides a level of guarantee in the government’s investment.
The other option is taking of the big banks and the financial sector and forcing rules that make them more open to lending to start-ups and other small-business ventures. This is fraught in two ways. Firstly, governments don’t want to be seen as forcing risk into the banking sector, which in Australia has a comparatively clean record against the risk and debt tainted sector of the United States. Secondly, of all the vested interests and powerful lobbying groups, the banks are amongst the most powerful. Having spent many years as a lobbyist, I know first-hand that banks and other financial institutions are a well-resourced voice in the corridors of power. They would fight any move they didn’t like tooth and nail, with major resources behind their position. This is not to say that they would prevail, but the mere threat means the government is more likely to look for policy options that wouldn’t be opposed in the first place. Would such measures be useful, we would have to see.
I am going to write further on this topic once the Murray Inquiry is actually released, and again discuss this issue. Until then, I hope this little primer has been worth the read.