I am asked regularly why has it become so difficult to raise finance and why have things changed so drastically ?
When I established Folio Finance 7 years ago, the economy was flush with cheap money and Banks, Commercial Lenders, Mortgage Trusts and Private lenders in Australia, couldn’t push their funds out the door quick enough. Commercial Finance sector in Australia was going through its own over inflated bubble. This resulted in more money chasing fewer deals, forcing lenders to take on transactions that were high risk with low return. It was an environment where investors and speculators could venture out and secure investments such as Commercial or Residential Property with little and sometimes no equity and the majority of the risk being transferred from the borrowers to the lenders. Of course, we all know this ended with many investors losing their investments in what were meant to be “secured” investment schemes with the worst impacts still being played in Europe and North America (where having a loan approved was as easy as confirming you had a heart beat). Thankfully, things didn’t get as “wild” here in Australia and the finance sector, supported by a 1 in 100 year mining boom, was able to sustain the impact of the GFC and now has to deal with some of the obstacles the GFC has created, mainly around funding , liquidity, sustainable profits and growth.
I think it’s always been difficult for SME’s to raise finance through our Aussie Banks. Reality is, Aussie banks have always been Asset lenders and never really a true supporter of small companies unless you had Real Property Security. Of course, any banker will deny this and will tell you that repayment capacity comes before security every time. This may be true but loans are rarely approved on Cash Flow alone.
Many factors influence the decisions made by banks. One of the major influences recently has been the greater Government scrutiny post the GFC . This , along with many other factors have worked in unison to create the current environment of tight credit and higher costs.
Rather than try explain them all, ill detail a few of the major issues making it more difficult for SME’s to attain Commercial Property Finance via the main stream banks.
- After the GFC, APRA (Australian Prudential Regulation Authority), our prudential regulator of all things Bank, placed larger capital requirements on our banks, stricter lending guidelines, and tighter portfolio controls than pre GFC. Specifically APRA requested the banks reduce their exposure to Commercial Property. This has created an environment where banks can “cherry pick” the best deals with the best margins without any real incentive to pursue business that doesn’t fit their criteria, simply because their portfolios are already overweight in this segment. Recently, this has resulted in a large percentage of customers being forced to refinance their existing Commercial Property Loans. With all the banks undertaking the similar “clean up” of their commercial property portfolios, many customers have found that they have no other option than to sell their property.
- Our banks fund approximately 30% of their capital requirements through deposits. For the remaining 70%, they rely on the global market for “mortgage backed securities”. Unfortunately, the over exuberant lending in America and Europe has tarnished the whole of the global banking industry and anything attached to mortgage backed lending. This has resulted in less money flowing towards this investment. With fewer investors, a higher premium is demanded to compensate for the higher perceived risk resulting in higher rates being passed to customers.
- Less Capital means that the banks have to squeeze more margin out of every dollar they have to invest. Because capital is scarce and the banks have genuine concerns about their ability to raise capital in the future, they now are chasing not only the best deals, but the best deals with the highest margins. The lack of real competition in the market, as well as the fear and publicity around the GFC and “those greedy Americans and Europeans who ruined it for all of us”, has resulted in the perfect storm for our local banks where they are able to raise rates, increase margin, and blame it all on external events supposedly “outside of their control”,
- THE LACK OF COMPETITION IN OUR MARKET IS THE REAL ISSUE. Real local competition is what keeps rates low and keeps the banks at toe. It’s what makes the banks think twice about increasing rates above and beyond those increases set by the Reserve Bank and keeps them working with clients, even when we aren’t the “perfect” prospect. There were many Commercial Lenders operating in Australia pre GFC and they were doing a great job at offering a real alternative to the banks. Unfortunately, they too relied on the global market to raise capital and were forced to close during the GFC, creating more reliance on the banks and more demand on their capital which provides the perfect environment for banks to continue to increase their profits, simply by charging a higher price for their products, without having to worry about innovation or improving their service proposition.
These are just some of the major issues influencing the local lending market and influencing the lending decisions of the banks. Thankfully, over the past 12 months, a number of Non Bank Commercial Lenders and Private Lenders, have reemerged to take on the banks and provide a variety of options for customers who wish to continue to grow and continue to invest in their future. As these lending institutions don’t have branches and rely on Brokers as their distribution channel, many of them won’t be known to you.
In the coming posts, we will discuss what some of these new funders have to offer, how their products and service proposition differ from the traditional banks, and some of the key advantages to using these products.
Of course, feel free to leave a comment or ask a question.