The previous article in this series, The Cashflow Gap (Part 1): What's Causing the Gap, and How Can Retailers and Wholesalers Close It, outlined the problems facing today's businesses in this sector. In today's piece, we're going to take a more positive view, and examine how retailers and wholesalers can manage this widening gap through inventory management.
Recognising the signs of a poor Cashflow
Before we can act on cash flow problems, we first need to recognise them. By applying certain calculations to our inventory, we can keep a watchful eye on the early signs of cash flow issues. Once we identify them, we can stop them in the act.
Calculate your inventory cashflow
Something you need to know is if your inventory will be able to meet the demands placed by your client. The calculation here is simple -just examine this year's inventory balance alongside last year's inventory balance. If the balance has decreased, year on year, this represents cash inflow - i.e. you have exchanged inventory items for cash. If there is an increase, this indicates unsold items, and a cash outflow, both of which can lead to problems.
Understand your stock turns and calculate inventory turnover
It is important to understand the number of stock turns you are seeking to achieve as a business. For instance, some retailers focus on 4 turns a year whilst a wholesale distributor may focus on only 2 turns a year.
Inventory turnover is basically the time it takes for you to sell your entire inventory. Use the following calculation.
Inventory turnover = Cost of goods sold / (0.5 x Opening inventory + 0.5 x Closing inventory)
If the result is 4, for example, this means you completely sell out and replenish your inventory four times a year. This number will help you to recognise whether your stock levels are too high or too low so you can adjust accordingly.
Understand inventory in real-time
Insight and understanding are key elements of modern business, particularly as the business landscape becomes increasingly data-driven and data-oriented. However, it is not enough just to know your inventory and your stock levels. You need to know this information in real-time.
This means deploying a solution that gives you up-to-the-second updates on stock levels. This gives you the power to enhance your customer experience and boost the efficiency of your replenishment procedures, while also giving you direct insight into how cash flow is manifesting itself on the warehouse floor.
Emma & Tom’s is a proudly Australian-owned business offering healthy minimally processed fruit products. They were experiencing a rapid growth and were required to manage multiple inventory locations. Dealing with fresh foods required zero lag in operations and inventory. They made a decision to implement an ERP system that enabled them to effectively manage their inventory. This resulted in a 30% growth year on year growth.
Implement 'Just In Time' model to streamline your supply chain
Wastage and shrinkage have an enormous effect on cashflow. If your stock is lying around for weeks or months in a warehouse or on a shop floor, this is just increasing the likelihood of shrinkage and reduced profits.
A Just in Time (JIT) supply chain model can help in this regard. Ordering in products or materials at each stage in the process, so they arrive 'just in time' to be used and then sold to customers, means that this latency period is eliminated and wastage is greatly reduced. The knock-on effect is improved cashflow at your end.
Pioneered originally by Toyota in the 1960’s, JIT inventory control is used for ordering parts when they receive new orders from customers. While JIT supply chain model works well for mid to large enterprise businesses, it may not work for small businesses. Supply-management consultant Johnson argues that small businesses don’t have the purchasing power or the linear demand frequency that is required for adopting JIT model. However, enterprise resource planning software solutions such as SAP Businessone are now becoming popular among small and mid-size businesses. SAP Businessone’s real time data analytics tools helps business owners get a clear picture of their supply chain at every level. Therefore, simplifying the entire supply chain process and helping businesses adopt a JIT methodology.
Better flexibility with supplier
Your suppliers are business people just like you and so they too understand the difficulties businesses can encounter when it comes to cash flow and inventory management. Aim to develop good relationships with your suppliers and to bring about a situation in which they are happy to work with you to provide the terms you need to get cash flow problems under control.
It may be necessary to renegotiate credit terms with your supplier, giving you more time to pay for any outstanding inventory bills you may have. This, in turn, provides you with additional breathing space when it comes to managing inventory cash flow. However, as mentioned, suppliers are business people too, with their own issues and their own bills to pay. As such, all negotiated terms must be mutually beneficial.
Work with suppliers who deliver on time
Which products are your best sellers? Which products are flying off the shelves and into the hands of customers? Which products are taking longer to shift? Knowing this is key to gaining a firm grasp on the management of your inventory.
From here, you can turn your attention toward your suppliers. For example, if a supplier is delaying sending out stock that flies off the shelves and needs to be instantly replenished, this is going to lead to delays, which will in turn harm cash flow. In this case, you should consider working with someone else. On the other hand, if the stock is a slow-burning seller and is difficult to find elsewhere, it may be worth continuing to work with the seller. It all comes down to understanding product demand and your inventory needs.
Facilitate and incentivise instant payments
We may consider invoice lag to simply be a fact of life. We deliver the goods our clients need, we provide the invoice, and we wait. However, this is not always the case - it may be simply that the facility for instant payment is not readily available. No one likes unpaid bills hanging over them. You may find that making it easy for your customers to pay instantly via credit or debit card significantly reduces your cash flow issues.
You may also decide to offer discount programs and other incentives to encourage this kind of instant payment, although you must make certain that these schemes do not erode your profit margins too greatly.
Manage your cashflow
Some suppliers require a 30-50% upfront payment on ordering. A combination of debt facilities and trade refinance facilities can help small businesses to manage the inventory sales conversion pipeline.
Cash flow is exactly what it sounds like - a flow of cash. It is not always necessary to receive a full payment upfront but you do need to ensure that the cash is flowing towards you at a predictable and manageable rate. This can be achieved through factoring.
For example - X Company receives an order for $1,000 of deliverables, which are sold with a 20% discount. They receive $800 up front, and the further $200 is delivered on a payment plan which is carefully managed and monitored. Adherence to the payment plan may result in X company offering a further discount once all cash is recovered if incentivisation becomes necessary.
Any wholesaler or retailers understands how difficult cashflow can be to manage. However, in today's market, the shortfall between paying for inventory items and recouping this capital through sales is growing. So what does this mean for Australia's businesses, and what are their options?
A recent report published by Xero exposed a staggering 62% of small businesses faced a late or unpaid invoice. However, today's cashflow problems go beyond this. In the current economic climate, wholesalers and retailers are being hit by a decline in the Aussie dollar and a recent trade war between China and the US.
In July 2018 Western Union currency strategist Steven Dooley and corporate hedging manager David Evans-Marcius discussed some of the challenges facing Australia's retail and wholesale sector. They expressed their concerns with particular regard to the Australian dollar, which slumped by 5% on FX rates in June alone, placing immense pressure on small businesses.
So what is causing this sorry state of affairs? You may already be aware of some of the age-old causes of a cashflow gap. You may have experienced the challenges they pose yourself.
These include:
Many businesses are happy to let some of their profits slide rather than methodically collecting all receivables due. Many consider this simply to be an unavoidable cost of doing business. Don't fall into this trap. Instead, make it your priority to receive the money you are due on every transaction.
For many retailers, the simple fact is, their outgoings especially property rent are too high while their volume is too low. Redressing this balance is a major step towards securing a healthier cashflow rate for your business.
David Finkel, writing for Inc.com in 2014, highlighted how many retailers are way off in their pricing. Finkel explained that the common reaction to a cashflow issue is to drive sales by dropping prices. However, if prices are too low, even an increase in sales is going to harm your returns as every item sold represents missed potential.
Businesses need funding in order to grow and to thrive in the market. Often, this funding and financing can be difficult to secure.
With Australia highly exposed to global trade and global trade expectations, growing tensions between the US and China have seen the AUD/USD lower. This has caused costs to rise for both retail and wholesale businesses.
As Evans-Marcius and Dooley explained, the international trade war is just one-factor causing problems for the AUD market here in Australia. Other factors weighing in the AUD include:
Unfortunately, none of these currency related factors look likely to change in the near future.
The above international trade factors have resulted in an FX spot rate at well below most businesses budgeted forecast. Budgeted rates need to be competitive and achievable in order to maintain a strong position in the market. As most SME wholesalers and retailers do not have the luxury of adjusting their budget rate, they may need to rely on “defensive hedging” to cut any losses and to afford protection for their business.
Defensive hedging – i.e. taking a hedge from a position of weakness – is not healthy for the sector, and is likely to prove to be a stop-gap move rather than a viable long-term solution.
In such turbulent times, finding an effective solution is vital. In this section, we will examine the effective methods for navigating this new retail landscape and for closing the yawning cashflow gap.
Never undersell your products. It is better to sell a reduced volume of products at close to their market value rather than desperately offload your inventory at a discounted rate.
Put a plan in place for maximising collections on all your receivables and for accelerating the process. Make sure invoices do not fall through the net.
This kind of streamlining may not always be possible, especially with very large retailers. However, trying to negotiate a reduction in your payment terms from 120 days to 90 days can hugely benefit your cashflow cycle.
Alternative lenders such as Banjo Loans can provide effective short-term funding to help you close the cashflow gap.
Rather than letting things turn sour with a supplier, consider negotiating extended terms while cashflow problems persist.
Businesses can reduce the risk posed by the dollar's FX rate by;
By stepping up to the cashflow gap now, retailers can turn things around and thrive, even in today's more challenging business climate. Next up in this series: The Cashflow Gap (Part 2): How retailers and wholesalers can reduce the gap by managing inventory.
On April 2nd, 2019, the 30K Instant Tax Write-off was introduced, an increase of 5K on what was currently available. A reason for rejoicing across Australia's SME landscape? Well, yes, but also no. The change in the threshold is only a temporary one, and will only be available until June 30th, 2020. The news may also be surprising to business owners, given that the level was increased from 20K to 25K only a few months before, back in January 2019.
The new $30,000 limit is great news for business and the economy; however, it is not the permanent fix many hoped for. Regardless of who is in power after the next election, this limit will be terminated at the end of June next year.
Well, time is limited, but you do have a year to get your asset write-off to submit, so there's no need to panic. If you want to get your asset written off this year, you will need to quickly however. Any asset purchases you may want to write off should be made without delay, and not left on the back burner.
According to the government, more than 350,000 businesses have already taken this advice and made their move, accessing the write-off within its first month of availability. The threshold of businesses who can claim has also been raised, and now businesses with a revenue of up to $50m are eligible.
Prime Minister Scott Morrison says that this covers 'an additional 22,000 businesses' and a further 1.7 million employees.
But how exactly does the write-off work 404? Let's take a look.
Let's say you purchase a vehicle for your qualifying business. The vehicle you purchase is worth $35,000 and was purchased within the tax period before the last one. You work out that your vehicle will be utilised for business purposes only 25% of the time, which means only $8,750 of the purchase price can be written off.
However, you do not qualify for the immediate write-off because the total value of the vehicle exceeds the $30,000 threshold. Instead, the taxable portion of the asset is added to your business' returns at the end of the tax phase.
Want to learn more about the 30K Instant Asset Write-off? Your accountant is a good person to talk to, as they will be able to help you strategise in the best way possible. If you want to access the capital needed to take full advantage of the 30k asset write-off before the end of the current financial year? Get in touch with the team here at Banjo Loans today.
The federal budget should protect small businesses. It should offer the provisions and the safeguards required to make businesses work for our society as a whole. But, above all, it must be delivered with SME owners in mind, recognising their importance to Australia's economy. So why are so many Australian startups and small business owners feeling left out in the cold by the latest budget?
What exactly has gone wrong here? We take a closer look and examine the three ways in which the federal budget has let Australia's SMEs down. It's not all bad news, but it's not all good news either.
The $30k write-off does just what it says on the tin -- i.e. it provides businesses with the ability to instantly write-off asset taxes on purchases up to $30,000. Of course, this sounds like a good idea, and it is, to an extent. Unfortunately, this provision for business in the latest federal budget may turn out to be something of a smokescreen, and organisations may end up being let down.
Good News
We'll start with the good news -- the latest federal budget has boosted the asset tax write-off by $10k, from $20k to $30k. This, of course, means that businesses can now achieve tax write-offs on major purchases up to $30k, and benefit from this in the same financial year, encouraging increases spending on assets and boosting the Australian economy in the process.
The turnover threshold has also been raised, this time by 500% from $10million to $50million.
Bad News
The critical bit of bad news regarding this is that the move is just a temporary measure. The current extension of the initiative is only valid until June 30th, 2020. This means that businesses do not benefit from long term confidence in asset investment, and neither does the Australian economy. Sure, the $30k write-off might get renewed, but equally, it might not, and business owners cannot work with this kind of uncertainty.
Andrew Conway, chief executive officer of IPA, outlined his concerns;
“We believe this initiative needs to be a permanent fixture of the taxation system and further increased to encourage business reinvestment, growth and employment opportunities,” Conway said.
There is also the convincing argument that the budget provisions are insufficient, and should be higher. If the government is serious about helping the country's businesses, they should consider exploring options beyond the $30k limit. The benefit this would have for our economy would be huge.
The thriving modern economy is a dynamic one, and one which is structured in such a way that it supports technological innovation and vision. The latest federal budget has paid lip-service to this, allowing for an increase in the Export Market Development Grant - or EMDG - and ring-fencing funding for spending in key areas.
However, critics of the budget have pointed out that these provisions fall short of delivering what businesses really need, and risk putting the development of our economy in jeopardy. Political motivations, as opposed to business-related ones, and a lack of understanding of the market, have clipped the wings of a potentially beneficial budget announcement.
Good News
It goes without saying that the increased funding for the EMDG is a good idea and one that will provide many businesses with the additional development revenue they need. The $3.4 million dedicated to supporting women in STEM careers, to be invested over four years, also makes for pleasing reading.
Bad News
While the budget announcement has offered some hope for business, it has also come up short in other areas. Critics have noted the lack of attention paid to the Research and Development Tax Incentive -- something that risks discouraging key innovators from pushing the homegrown business sector forwards.
StartupAUS CEO Alex McCauley highlighted the lack of vision displayed by the government within their new budget;
“The Treasurer chose to focus on the status quo rather than outline his government’s strategic plan for transitioning the Australian economy into an increasingly technology-led world,” McCauley said.
About the R&TDI scheme, McCauley went on to say;
“It is critical to ensure that high-growth startups are unequivocally welcomed under the scheme as soon as possible. This is an urgent issue and was left unaddressed tonight."
Sufficient access to funding is a perennial concern for small business in Australia and across the world. As a result, it was important that the new federal budget really got to grips with this issue, and showed that the treasury was serious about giving SMEs the boost they need.
Alas, this was not to be.
Good News
Small business funding was always going to be a hot topic at budget time, thanks to the Royal Commission's recent report. The Royal Commission has recommended enhanced accountability for the big four commercial banks and lenders in Australia, which is undoubtedly good news for businesses seeking the capital they need.
Along with the budget came the news that the Small Business Minister's Office is also working on how to lower the hurdle for businesses securing funding, potentially reducing the need for business owners to pledge their personal property against the loan value.
Bad News
One serious bit of bad news is that the need for business owners to put up their homes as collateral is still there. This has been a significant complaint among small business owners for some time now.
Other complaints include loan inflexibility (73% of business owners cited this as a frustration), and loan conditions (80%). Neither of these concerns has been adequately addressed by the recent budget.
So, the news is not great following the release of the budget, but at least alternative lenders such as Banjo Loans provide some hope for small businesses. If anything, the latest budget news suggests that a greater need for these kinds of alternative lenders than ever before.
Australia relies upon its small businesses, and these small businesses rely upon capital if they are to grow and survive. In many cases, business owners already have a clearly defined plan for growth, but there is one problem -- the capital they need is not available.
This is where government bodies, financial services firms, brokers, business mentors, and the accounting sector, all have a part to play. It is these entities that help business owners better understand their options for financing.
For many small and medium-sized businesses, it is the timing mismatch between inflow and outflow which causes cashflow problems. With this impediment in the way, how can a business also hope to fund growth? What many business owners do not understand is that growth must be linked with the source of capital, and, instead, they focus primarily on their revenue targets. To grow, a business must win new contracts, hire new staff, purchase more inventory, or pay deposits to the manufacturers of their goods, and all of this rapidly absorbs cash.
So what is the alternative? One route is to generate cash internally, but how can this cash source be unlocked? Many business owners cannot even visualise the sources of cash within their organisation -- for example, in the inventory already sitting on the warehouse floor, or the longer term contracts currently being worked on. How can they be expected to implement the strategies needed to extract this cash? The answer lies in finding a good and reliable accountancy team.
Let's consider, as an example, a rapidly growing company that has been successfully operating for more than four years, generating $2M+ of turnover. This company has historically funded itself in the following ways;
These funding sources might seem like two fairly solid revenue channels, but there is a problem -- the business is not generating enough capital to grow and has had to miss out on key sales as a result. The funding methods this business are using are simply inadequate.
Of course, this is just a single example, but it rings true for many. Research shows that 67% of small business owners who are focused on long term growth will use business profits as their primary means of funding, while 19% rely primarily on personal savings. Only 8% will opt to use a business loan to fund their growth.
On the surface, this appears to be a wise choice. Borrowing small business growth capital is commonly viewed as a risky strategy, after all. However, this approach could be stifling businesses.
By using controlled borrowing alongside short-term working capital, companies are, in fact, able to accelerate the velocity and quantity of their supply chain, and so take advantage of the market demand. Increased speed to market, combined with a higher quantity of readily available inventory, translates to increased revenue.
Banks, too, and alternative lenders, such as Banjo Loans, can be sources of capital.
The business in this example - an online retailer -- believes they require a 'touch and feel' component to assist sales, and have the opportunity to place stock into European, Canadian, and US markets in time for the northern hemisphere's summer. To cover manufacturing costs, the company used internally generated funds to pay for a 50% deposit with a Chinese manufacturer, but the goods will only be delivered when the final $250K is paid.
While the company waits for further capital to be unlocked within their business, they risk missing out on this lucrative summer market, which could cost them $1.0M in sales. Borrowing the $250K would secure this projected $1.0M, with the same operating cost base for the company, with increased profitability.
In another example, Banjo Loans formed a relationship with a domestic manufacturer of niche transportation vehicles. The manufacturer's turnover was then $1.5M, but market demand was far in excess of the company's capacity to fund the increase in raw stock, as well as manufacturing lead times, finished goods, and credit terms for buyers.
A 30% deposit to manufacturers in China was covered using working capital, as was the purchase of raw materials upfront. Banjo Loans assisted with a short term working capital facility, enabling the company to accelerate its products' journey to market. Their growth in revenue is projected to exceed $7.5M in 2019.
Both of the above examples highlight the 'butterfly effect' within the Australian economy, in which access to funding directly increases turnover, revenue, and profitability. This was highlighted in the Fintech in Australia study, conducted by Frost and Sullivan in 2015, which forecasted how the Australian fintech sector would grow at a CAGR of 76% by 2020 and add $1B of new value to the Australian economy.
But what does this mean on a global scale? When looking at the bigger picture, we can see that 90% of businesses worldwide are classed as SMEs, contributing 60% of overall employment and 50% of gross added value.
A report from the United States, released in May 2018, found a huge upsurge in the amount online small business lenders are providing to SMEs, as well as a huge resulting economic impact. Between 2015 and 2017, small business lenders such as OnDeck, Kabbage, and Lendio;
We can see these same results in other key global markets, such as in the UK.
The data also shows just how big of an impact these lenders have for businesses in local communities across the world. For every $1 lent to an SME, as much as $3.79 of gross output is achieved in the community on average.
There are still challenges to be faced in Australia, but the future looks bright. The rise of fintech and alternative lenders looks set to connect more businesses than ever before to the growth capital they sorely need. And this is, without a doubt, great news for our society as a whole.
There is a new breed of successful businesses that all share one common characteristic. They are customer-first, not product-first. This shift in focus becomes difficult in more well established organisations who have built processes and infrastructure to deliver products they feel comfortable with rather than creating positive experiences for their customers. However, in the modern business world, it is the customers’ desires (and not the business’) that need to come first and inspire innovation and growth.
This is where the product-first model falls short. Instead of dictating to customers, businesses need to listen - and listen well - to what their customer base has to say. In this article, we'll be looking at this in more detail and understanding how small businesses and lenders alike can adopt this new focus.
Data really is everything in modern business. This is not simply because it is helpful for seeing evidence of the results, but rather, it's because business owners need this evidence and this understanding if they are to bring about meaningful changes in their operating procedures.
So, how do business owners measure customer-centricity and how do they receive proof that their efforts are working effectively?
A recent article published by McKinsey & Company identifies three core elements to successful measuring and analysis of customer-focus in business. These are:
This means expanding the focus of analysis to cover the totality of the customer experience. Rather than solely focusing on a transactional touch point, businesses must gather data from the entire customer lifecycle in order to properly understand how the customer is interacting with the organisation.
The second element requires the deployment of the necessary technology at every stage; technology which makes it possible to gather this valuable data. This includes technology to capture direct, qualitative data from customers, as well as tech which integrates survey results, social data, and other sources on a usable platform.
The feedback loop concerns your customer-facing staff in particular. Your staff need to be able to capture the data provided to them by customers regarding their experience, and then wield this data as they aim to enhance this experience in the long term. This means developing the end product so it is more in line with what the customer needs, as well as applying the same approach to customer service.
And how about the metrics? What should business owners be measuring to ensure that they are adopting a customer-first approach?
There are two key aspects here:
Now that high levels of customer focus have become so vital to modern businesses, it is no surprise that small business lenders are adopting a similar approach. The recent Royal Commission report by Commissioner Haynes pushed lenders to be more customer-focused, directing institutions to act fairly, legally, and with their customers' best interest at heart.
This is a far cry from the traditionally product-first landscape of business lending, in which little attention was paid to relationship building and offerings were often unfit for purpose with regard to small and medium-sized businesses.
The new breed of alternative lenders have recognised this and are already ahead of 'the big banks' when it comes to a profoundly customer-oriented focus. Lenders such as Banjo Loans have the doctrine of being customer-first written into their very DNA, and are characterised by a distinct focus on responsible lending. We can see this in the impact of the lending strategies on the customer themselves - with a customer-first approach, the entire customer experience is supported at each turn, eliminating things like financial stress which can also affect personal lives.
This pleasing shift in focus is evident in other areas too. Accountancy services are becoming increasingly geared towards the customer, and are incorporating improved advisory, auditing, and taxation capabilities, which are more in line with what the client actually needs as opposed to what the accountant wants the client to need. Alignment of need and product, or need and service, is leading to a far brighter future for businesses and is supporting their ongoing growth.
Uber, Amazon, Netflix - chances are you've heard of these organisations. It's no coincidence that all three are obsessed with their customers. The emphasis on customer-focus is not always easy to achieve but it must be the goal of all businesses if they are to grow. There is no way to side-step this challenge - the customer must come first, every time.
A business loan that has been provisioned without requiring standard financial documentation is termed as a Low doc business loan. Small businesses often find it hard to avail the funding they need and find themselves turning to availing low doc loans. This is worrying, because low doc loans can be risky.
Businesses need funding and most common reasons published by Small Business Loans Australia are Woking capital (35.28%) and debt consolidation (10.69%)
Low doc loans are firm adherents to the old adage that if something looks too good to be true, it probably is. This is because, while low doc loans appear to be a relatively easy access point for the funding a small business really needs, the cost that the firms ends up paying over the lifetime of the loan period could be excessive, and even damaging to the business.
The bulk of the cost of a loan is made up of the following components;
As a low doc loan is considered to be of a higher risk to the lender, the lender will work to mitigate this risk through increased costs. These increases can be manifested across any of the components listed above. You can use a loan calculation tool like the one provided by Finder to independently verify the total cost of your low doc loan.
So, a low doc loan is an initially attractive proposition that could end up costing a small business serious money in the long run, but what are the direct risks? Well, the most obvious risk is that ongoing costs and interest rates are so high, and charged over an almost indefinite period, that they end up crippling the small business which is meant to benefit from the loan.
This changes the complexion of the problem a little. Paying a large amount of money over a long time can be seen as wasteful and inefficient, but this is not usually considered fatal for a business. Now we are seeing situations in which increased rates are actually putting companies out of business altogether, as firms incur more debts in an attempt to manage the initial credit facility.
Much of this is due to difficulties in assessing future incomes and earnings for small businesses. These earnings can fluctuate across the financial year, and smaller organisations may be particularly susceptible to project shortfalls. By taking on a low doc loan, the business might be approved for the credit, but they are leaving themselves wide open to the potential risks.
Any risk to Australian small businesses is a risk to the Australian economy as a whole, which relies heavily upon these smaller scale enterprises and the growth they achieve each year. As a result, it is no surprise that the government is seeking to take action against the seemingly cavalier attitude displayed by some lenders in the small business loans market.
The Financial Ombudsman Service Australia has published a document outlining its approach to low document loans, and to the disputes which arise from them. Rather than simply using low doc loans as a means of squeezing money from small businesses in the form of exorbitant rates, lenders are now required to apply a much more rigorous set of checks ahead of providing the loan, and may only provide credit facilities to those businesses who meet these criteria.
In the event that this does not take place, and a loan is provided to a company that cannot afford it, the business which acquired the loan has the legal recourse to raise a dispute via the ombudsman's office. The burden of proof now rests with the loan provider to show that they carried out the necessary checks.
These checks include ensuring that the company has held an ABN for at least one year prior to the applications, as well as credit checks and other assessments.
The trouble is, small businesses do not generally turn to low doc loans by choice. Instead, they explore this option because they lack the documentation required to acquire loans of other types. To put it simply, they have nowhere else to turn.
Or at least they didn't have. The financial technology, or fintech, revolution is beginning to provide real alternatives to these risky credit facilities, and streamlined application and decision processes are enticing increasing numbers of SMEs in this direction.
But it is not just ease of access that is turning small businesses towards the fintech option. Customised solutions provided to specific businesses, meeting their needs perfectly with a more personalised approach, have proved popular among businesses seeking the capital they need. In addition, fintech lenders are showing themselves to be more committed to transparency and responsibility than their more established counterparts, with Smart Company reporting that six Australian fintech lenders had put their signatures to a new code of practice for lending in the summer of 2018. A raft of other non-bank lenders such as Banjo Loans has been members of AFCA and signatories to the Banking and Finance Oath.
So, while low doc lenders are exposing businesses to unnecessary risks, the future does look bright, thanks to increased awareness regarding the dangers of a low doc loan, and the future-focused solutions offered by today's fintech service providers.
Starved of credit?
At Banjo, we share in the vision of small businesses, we love hearing exciting business ideas and inspirational stories of business success. Most of all, we like to see people out there pursuing their passion. There are 2 million small businesses in Australia employing around 49% of workers and representing some 97% of all businesses in Australia. These stats make it clear that we all benefit if small business, the backbone of our economy, has the support and environment to develop and grow their businesses.
So we were perplexed that now, 7 years after the GFC, small businesses globally remain starved of credit and Australia is no different. One issue raised frequently in the small business sector is; ‘why is it so hard to get the funds we need to grow our business?’
Of 2 million SME’s (Small to Medium Enterprises) in Australia, 51% have no lending product at all and they are typically funded with family loans or credit cards at rates closer to 25% without generally adjusting pricing to reward lower risk borrowers.
Funding for SMEs globally has become constrained during the recession and stayed at these low levels since: it is generally more profitable for traditional lenders to make a $2m loan than a $50,000 one.
Post GFC traditional lenders have grown their personal and home loan credit books at much faster rates than their small business books. This has been attributed to a number of factors such as the relative riskiness of SME loans to housing loans, greater capital requirements for SME compared to other forms of lending and finally reduced competition amongst business loan providers post GFC.
Submissions to the recent Financial System Inquiry[i] stated structural issues such as information asymmetry, regulation burden and the taxation system also as possible contributing factors to the lack of business finance provision to SME’s.
There are a number of initiatives being implemented internationally aimed at addressing the same issues Australian SME’s face accessing finance, and we could consider some of these as roadmaps for our creation of a better SME world.
In the UK, high-growth businesses with low levels of fixed assets also have difficulty accessing credit. The UK Government launched a number of initiatives to support small businesses following a 2012 Parliamentary Review[ii] such as:
In the US, two initiatives in addition to those above caught our eye:
At Banjo, we take an active role in advocating for small businesses in Australia. SMEs are the job creators and innovators we need to keep the Australian economy growing.
Banjo introduces a new online marketplace lending platform built by Australian banking experts who simply thought there must be a better way to provide unsecured loans to SMEs. We want to make it easy so business owners can get on with what they do best!
Increased competition in Australia will be good for business.
Recent calls by the industry to reduce the red tape burden on SME’s by automating BAS and income tax returns are positive initiatives. We support the government task force working to explore the potential of technology and digital platforms joining with the Government to make it easier and more streamlined for businesses to interact.
Over the coming 12 months, the team at Banjo will place their shoulders on the wheel to work with Government, Industry Bodies and the Banking industry to explore ways in which we can all work together to create the right environment for small businesses to flourish in Australia.
Imagine being able to just get on with the business of running your business!
Sounds just brilliant to me.
[i] www.australiancentre.com.au
[ii] www.gov.uk/government/consultations/sme-finance-help-to-match-smes-rejected-for-finance-with-alternative-lenders/sme-f
[iii] http://alternativebusinessfunding.com.au
Cash is the oxygen that enables a small business to survive and prosper, and is the primary indicator of business health. Good cash flow is essential for all businesses. It can sometimes seem daunting, but it needn't be complicated. Our tips are designed to help you reduce your costs and keep your cash flow healthy. By Andrew Colliver, CEO, Banjo
That’s easier said than done. Do you ever put your book-keeping to one side because you’re so busy ‘running’ the business? It’s understandable, and in fact quite common, but if the books aren’t organised, trouble lurks around the corner and your business has cashflow problems before you know it.
The best way to get the books in order is to use a transparent cloud based accounting system like Xero or MYOB (which reconcile with your bank account) and to make sure that it is kept up to date. Once your accounts are in order you’ll be able to stay on top of what funds are available immediately and what’s still in your clients’ bank account waiting to be transferred.
With this level of understanding you’ll have a clearer picture of what funds need to be accelerated by using a funding platform such as Banjo Loans, so you can stay on top of your cash flow but also meet your growth ambitions.
Bad debts are funds owed by customers that cannot be recovered. They are a real nemesis of every business and can easily occur if a proper credit control system is not put in place early on.
Cash generated by the business is the cheapest form of capital. Generally, the shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line.
That’s probably the toughest of your financial challenges. If your clients’ credit terms are out of sync with the credit terms of your suppliers, negative cash flow can build up pretty quickly.
There are different strategies that can be applied:
Growth is what every business aims for. However, without the right strategy and tools, rapid growth can cause cash flow problems and hurt the business. Again, there are various scenarios you could implement.
Businesses often face more than one of the above cash flow problems. Paying close attention to your company’s finances and having the right solutions ready to be deployed whenever required will ensure that you make it through the first five ‘survival years’ and become a success story of tomorrow.
At Banjo, we’re inspired by your stories, how do you keep your cashflow in check? What challenges have you faced on the road to growth? . Tell us about your Just Brilliant business! We’d love to hear from you on the below email link.
