NAB leads changes that could produce a small business breakthrough

ROBERT GOTTLIEBSEN
MAY 8, 2019
The Australian

The game of bluff and tactics over trade and technology barriers between China’s Xi Jinping and America’s Donald Trump, which I detailed yesterday, has triggered a big fall on Wall Street.

This underlines that whoever wins the Australian election must foster local business activity—particularly in the small and medium sized business arena. And here I bring good news from a surprising direction.

There is no more embattled bank than the National Australia Bank, but sometimes when an organisation is under extreme pressure it can achieve remarkable results.

Australia’s business lending and small business equity fields are gloomy spaces. Westpac’s business loans in the half year to March 31 were down about six per cent and the average of Westpac, ANZ and Commonwealth business lending edged up by a token 1.3 per cent.

But in that atmosphere of business banking gloom the NAB actually increased its business lending by 5.3 per cent— a standout performance.

How it achieved this tells us a lot about the encouraging future of our nation’s small and medium-sized business community.

First, the growth areas of NAB business lending showed remarkable similarities to the employment growth that the US is experiencing. Health businesses and professional services led the pack in Australia just as they have done in the US. NAB also increased its agricultural loans substantially, despite the drought. Clearly Western Australia would have been a big factor in this growth but there is a new era in high technology agriculture emerging which will require matching technology in banking.

In the total business banking area NAB’s business banking chief Anthony Healy has been challenging his geographic area managers to select industries in their area where there is untapped business and to forecast the extent of the likely growth. Where those forecasts can be justified and produce worthwhile figures the area manager is allowed to increase staff to achieve the goals. So, in the midst of banking closures and cost reductions, people are actually being hired to lend to business.

But there is a second development that is incredibly exciting for banking’s future, because I believe it will be followed by other banks.

The lead weight over medium and smaller business lending has been the bankers’ demand for security over real estate – usually the family home. It is dismal choice for a business person because if something goes wrong with the business (and small business is high-risk) the family home is lost. Spouses and partners of entrepreneurs are increasingly saying “No” – the family home must be separate.

The new accounting systems being operated by Xero and MYOB have changed the game and now produce cash flow information (and forecasts) on a real-time basis, which can be monitored both by the business and the bank. So, NAB is now lending on cash flow without real estate security or guarantees. Suncorp has joined them.

The loans are based on the strength and the cash flow of the business, rather than bricks and mortar. To gain such a loan, a small business needs to have at least 12 months record of cash flow. It is early days and the loans are restricted to about $100,000 ($150,000 for equipment) but these unsecured cash flow loans have now reached 45 per cent of NAB’s small business lending.

Bank shareholders maybe be somewhat alarmed at the apparent risk involved, but the interest rate is set at around 13 to 15 per cent. It’s not cheap, but it’s less than credit cards and once the market is more competitive and the cash flow reliability estimates are finetuned the rate will fall.

At this stage it’s only a small part of the total NAB lending portfolio, but it is growing rapidly.

Apart from trading conditions the biggest uncertainty is the unpredictable and dangerous culture of the tax office. The newly-established Small Business Tax Tribunal provides will provide security for lenders that the law-abiding businesses they support will not suddenly be sent to the wall by the Australian Taxation Office.

In addition the new fair contracts legislation, if it passes the new parliament, will transform the security of cash flow while the efforts of the politicians to have invoices paid quickly will be an equal advantage.

Suddenly the accounting systems, the legislative environment and the ATO are changing to enable cash flow lending and it is set to be a big growth area.

Commonwealth Bank, Westpac and ANZ have seen the NAB success and are looking to boost their business banking.

On the equity side NAB is pushing very hard for a UK-style business growth fund which will provide equity for small businesses. The government has agreed to start one in Australia and the ALP has also backed it.

The NAB expects to inject around $100 million, depending on the size of the fund and number of participants, to match the government and it will require other banks to make a similar contribution.

The UK business growth fund has invested some $2.7 billion in 230 companies and has been an incredible success.

My hope is that along with all the other changes that have been achieved this will come into operation in the first year of a new government, no matter who wins.

We will then have a totally different small and medium-sized business environment.

However whereas large enterprises have departments to manage complexities of hiring staff it is a very difficult process for a small operation. Hiring needs to be made simpler. In the meantime, small business is overcoming the problem by networking individual contracting operations and its working.

ROBERT GOTTLIEBSENBUSINESS COLUMNIST