Australia is known for its laid-back culture. The mantra of “no worries mate” follows us everywhere – from weekend visits to the beach with family, to the café on the way to work and even into the office. In some ways this mindset can be a useful tool in business. It helps us maintain a level head, which can lead to healthy decision making and give Aussies an advantage in contexts such as negotiations.
However, just as there are scenarios in which our relaxed attitude can serve us well, there are also those where it could be doing us harm. In fact, Australian SMEs may be on the verge of experiencing some painful ramifications of carrying our laid-back culture into business circles.
Along with being easy-going, Australians have a fixation on running their businesses through their property wherever possible. It’s not uncommon for businesses to fund against the sole security of a home and mortgage, a norm for the past 30 years.
Gaining finance from the banks in this way has the appeal of being a low-cost option. Getting major personal assets to work for them may also seem like an easy way for business owners to manage their finances, by receiving all funding through one channel.
However, this myopic approach can actually make things much more complicated, risky and costly in the long run. What happens, for example, if markets change or even the economy as a whole? We’ve seen it happen before, with disastrous consequences for businesses the world over. We were lucky in Australia then, more or less dodging the proverbial bullet. But what if there was still one in the chamber? A laid-back attitude isn’t going to be much help then, with “no worries” replaced by panic.
In 2008, America dropped their interest rate to zero following the stock market crash. The result for Australia was that interest rates plunged dramatically, to around 3% from what had been hovering at the 18% mark in the 80s and 90s. This seemingly opportune situation fostered a free-for-all in terms of loaning and lending, and it’s remained like this for a decade.
Has the continual decrease of interest rates made us complacent in Australia? We might have missed the brunt of the global financial crisis, but we also missed the learning curve. What many don’t realise is that interest rates in the US are now rising again, potentially pulling our rates up with them in the mid-term. With the international community borrowing predominantly from the US, their economic standing directly affects the rest of the world. The gravity of healthy American interest rate growth is affecting our own rates in a way that many aren’t prepared for.
Whilst the Americans are preparing for a more positive period, we in Australia are entering a time of relative uncertainty. This is the first time in a long while where banks may have to start downgrading commercial and private assets. That puts us in a position similar to that of the US 10 years ago – and that’s not a great one to be in for Aussie business owners. Compounded by dropping property values nationwide, the pressure is on for banks; and that pressure will shift downwards, falling on the shoulders of SMEs.
To make matters more interesting, the recent implementation of APS120 requires banks to conform with Basel iii and iv and the findings of the recent Haynes Royal Commission. This means that banks now legally have to hold greater equity per dollar for every loan given to clients. These regulations are relevant across SME lines of credit and properties, substantially tightening the lending criteria of banks.
For those who are mixing professional with personal by receiving a large proportion of their business financing through property, the situation could be painful. Some banks have already begun asking such business owners for sudden revaluations of assets leveraged against loans. This can then lead to lenders demanding top-up investment from businesses or even pulling their funding altogether.
The best way to avoid a blow from the banks is to minimise your point of risk. Financial syndication is a simple way to spread risk and reduce the potential anxiety involved in funding business. By diversifying their avenues for funding, sharp business owners remove the need for bank loans supported by assets as collateral. Simply put, financial syndication is where businesses receive finance from multiple, manageable sources.
With markets changing, now is the time to decrease your deposit-based finances and look at the full picture for your business. Ask yourself honestly: if a hard year was to arrive, how would you be able to cope? If your business was to take a major, unexpected hit, could you survive?
Take a moment to assess what other means of funding you can utilise to gain capital beyond what you already have in place – so you don’t place all your eggs in one basket. There are numerous ways to go about this. You could start leveraging your invoices through a debtor finance facility for example, or use stock as a resource to seek inventory finance.
Four more reasons to diversify your finance
It’s time for Australian business owners to stop being complacent. It’s time to accept that running the business off a lazy balance sheet is a luxury we can no longer afford. Being proactive is the best way to avoid getting unnecessarily caught out in the future.
So, speak to your financial advisor about your options. Learn more about the current economic climate and predictive trends, considering how it will affect you and your company. By broadening your understanding of your business, your industry and the environment you’re subject to, you can protect yourself from anxiety further down the line.
These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.
Whilst material has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.