SMEs facing higher rate of rejection for finance applications

Small business owners applying for bank loans are facing a higher rate of rejection of applications for finance according to a new CPA Australia research report.
The study, carried out in Western Australia, uncovered a bank loan rejection rate of 12 per cent for males and 15 per cent for females, which contrasts with the US rate of just two per cent unsuccessful loan application rate - pointing to a significant supply-side 'finance gap' within the sector.
The report, 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.
CPA Australia Business Policy Adviser Judy Hartcher said 'Considering the high rates of finance application rejections the study uncovered, it is clear that 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.'
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.
'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,' Ms Hartcher said.
'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 consider relationship lending to be an important factor when it comes to choosing a financial institution.
Given that small and medium enterprises are responsible for significant levels of employment, innovation and productivity, CPA Australia considers it important to understand the determinants of SME growth, including access to funding to support growth. Lack of adequate funding constrains the development and growth of SMEs and causes financial distress.
The major findings of the research project are:
- Finance Gap: A supply side 'finance gap' exists within the Australian SME sector, with a bank loan rejection rate for males (12%) and females (15%) found in the WA survey - compares to 2% in the US
- 'Discouraged' Borrowers: There is little evidence that SME owners are being discouraged from applying for bank loans in Australia, contrasting with higher rates in the US.
- Discrimination: The study found no evidence of bank discrimination against female SME owners, and success rates of males/females were similar (noting 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, indicating that an individuals psychology is a major factor in seeking bank funding.
- Goals: Goals of quality and reputation, independence and staff relations ranked higher than financial rewards for many SME owners
- Choice of Bank: Relationship lending is an important factor impacting SME owner's choice of financial institution, so the development of close associations with SME clients and their advisors is important
- Advice: The study reinforces the role that accountants can play in advising their SME clients about the benefits and risks associated with accessing external funding, and guiding SME owners through the application process.


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