SMEs & Banks: bridging the gap

A NEW research report into the issues faced by small business owners applying for bank loans has found evidence of a surprisingly high rate of rejection of applications for finance. The study, undertaken in Western Australia, uncovered a bank loan rejection rate of 12 per cent for males and 15 per cent for females, which contrasted with the US rate of just 2 per cent and pointed to a significant supply-side finance gap within the sector. The report, commissioned by CPA Australia and titled the SME Finance Gap – Myth or Reality?, was conducted by Associate Professor John Watson, who works in the field of SME performance measurement and evaluation at the University of Western Australia’s school of accounting and finance. The study explored three funding issues within the Australian context – evidence of a finance gap and/or discouraged borrowers, evidence that banks discriminate against female SME owners and the importance of personal characteristics of SME owners in their decisions regarding bank funding. CPA Australia business policy adviser Judy Hartcher said that, considering the high rates of finance application rejections the study uncovered: “It is clear accountants can play an important role in assisting SME owners through the application process with the object of securing the finance they require to fund business growth. “On the positive side, the research failed to uncover any perception of bank discrimination against female SME owners, however, the sample of female SME owners was quite small so other factors may have influenced this result. “Earlier focus groups found females more risk averse than males and less inclined to access bank funding. “They were also inclined to repay bank loans earlier than their male counterparts, so there is evidence that males and females take a different approach to financing.” The report also found that SME owners considered relationship lending to be an important factor when it came to choosing a financial institution. Given that small and medium enterprises were responsible for significant levels of employment, innovation and productivity, CPA Australia considered it important to understand the determinants of SME growth, including access to funding to support growth. Lack of adequate funding constrained the development and growth of SMEs and caused financial distress. Major findings of the research project. Finance gap: A supply side finance gap existed within the Australian SME sector, with a bank loan rejection rate for males (12 per cent) and females (15 per cent) found in the WA survey that compared with 2 per cent in the US. Discouraged borrowers: There was little evidence that SME owners were being discouraged from applying for bank loans in Australia, contrasting with a relatively large proportion of discouraged borrowers in the US. The higher unsuccessful loan application rates reported in this study were partially compensated by there being fewer discouraged borrowers. Discrimination: The study found no evidence of bank discrimination against female SME owners and success rates of males/females were similar, given that the sample size of females was relatively small. Risk aversion: The inclination towards risk taking was significantly higher for SME owners who applied for bank loans, compared to non-applicants, indicating that an individual’s psychology is a major factor impacting the willingness to seek bank funding. The study clearly indicated that other personal issues played an important part in an SME owner’s capital structure decision making. In addition, the applicants, compared to non-applicants, were significantly more likely to use any surplus funds generated by their business to fund growth. Goals: SME owners goals of quality and reputation, independence and staff relations ranked higher than financial rewards, indicating that profit maximisation might not be foremost in the minds of many SME owners. Choice of bank: Relationship lending is an important factor impacting SME owner’s choice of financial institution, so financial institutions would be well advised to maintain and develop close associations not only with their SME clients, but also with those advising SMEs (eg accountants). Advice: The study reinforced the role that accountants could play in advising their SME clients about the benefits and risks associated with accessing external funding, and assisting SME owners through the application process. The “SME Finance Gap, Myth or Reality” report arose from an earlier project involving three focus group sessions with SME owners who had considered – or were considering – a major expansion of their business that would require significant external funding. The majority of SME owners were acutely aware of the various risks associated with business ownership, and were unlikely to consider external funding if there was a reasonable likelihood they could lose control of their business. The findings of this study provide valuable insights into SME owners and their decision-making process when deciding whether to apply for bank funding and may assist not just banks, but those who provide professional advice to SME owners on funding issues. A copy of the report may be downloaded from the CPA Australia website, CPA Australia is one of the world’s largest accounting bodies, representing more than 108,000 finance, accounting and business professionals in Australia, Asia and Europe.


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