Small businesses in Australia have a hard time getting finance. Other countries offer a different solution

Lending to small business is different

Lending to a small business is very different from lending to someone buying a home. If a homeowner can’t repay a loan, the bank can usually recover its money by selling the property.

A business is different. Its success depends on customers, sales, management and the state of the economy, and all of that can change quickly. So banks fall back on what they can count on. They can put a number on a house and know how to sell it if things go wrong. A business doesn’t give them that same certainty.

Many countries have concluded that leaving banks to bear all the risk can discourage lending, particularly during periods of economic uncertainty.

Where the government steps in

Governments in countries such as the United Kingdom, Germany and France have established permanent institutions that share part of that risk.

The United States relies on the Small Business Administration to guarantee a part of eligible business loans, up to US$5 million. Research found these guarantees expanded access to credit for small businesses that otherwise struggled to obtain conventional bank finance.

The United Kingdom’s economic development bank, the British Business Bank, supports lenders through government-backed guarantees and lower-cost funding in financial markets. A review found the guarantee enabled lending that 51% of borrowers otherwise would not have received.

Germany’s state-owned investment bank KfW lends to business alongside commercial banks to share the risk. France’s government-owned public investment bank, Bpifrance provides loan guarantees, making it easier for small businesses to borrow from banks.

An OECD review found that studies from countries including France and Italy showed public credit guarantee schemes increased small business lending, while reducing collateral requirements.

Different countries have chosen different models, but they all start from the same idea: when some of the risk is shared, banks are more willing to lend to businesses that have strong prospects, but limited collateral.

The big four banks dominate

Australia’s system has evolved differently. Compared with many advanced economies, Australia has relatively limited public institutions dedicated to sharing small business lending risk across the financial system.

Instead, most of the risk remains with commercial banks and specialist lenders. Because they carry most of that risk, lenders naturally place greater emphasis on collateral, particularly residential property.

It’s one reason many Australian business owners still need to secure business loans against their homes, even when their businesses are profitable and growing.

It also helps explain the growing role of specialist and non-bank lenders in serving businesses that fall outside traditional bank lending criteria.

That makes it particularly difficult for renters, younger founders and newer arrivals, who often have little or no property to pledge. A good business isn’t always enough without an asset behind it.

The share market reaction to Judo Bank’s news was triggered by three troubled loans. But it also highlighted a broader question about Australia’s financial system.

Small business lending will always involve risk. The question isn’t whether that risk exists – it always will. The answer shapes which entrepreneurs get financial backing: not because they lack a good idea, but because they lack property to offer as security.

The question is whether Australia is backing its best businesses, or simply the ones that have homes as collateral.