…And why it will eventually become easier?
Many people have bemoaned the fact that it’s very difficult to get funding these days. Especially if you’re self employed. The reasons for this are numerous and in this article we try and explore why without getting too technical.
Between 2009 and 2012 Australia lost a quarter of a trillion dollars in funding capability. This was mainly due to the rush to the exits by the European banks (as well as a few North Americans). For many, this was the beginning of a liquidity crunch in Australia that was a symptom of the unfolding Global Financial Crisis.
Around the same time (and implemented a couple of years later) the banking regulators were formulating new liquidity measures for our banks. This meant that banks needed to demonstrate that they had a 30 day cash buffer in case of a crises. This was called the Liquidity Coverage Ratio and it’s parameters were defined by a banking committee in Switzerland. In short, the way this affected most people was that it became almost impossible to break a term deposit without providing the bank 30 days notice. I won’t bore you with the details but there’s a very good paper on it by the RBA here.
Then in 2013/14, APRA began to use the threat of capital controls on Australian banks to restrict lending to the mortgage market. Initially, this was a cap placed on banks so that they couldn’t increase their share of mortgages by more than 10% annually. In 2015 the banks began to differentiate between owner occupied home loans and investment loans by charging investors around 0.40% more.
In 2016, the banks made it almost impossible for non-resident borrowers with a non-resident income source to borrow. They also stopped lending to property developers for construction risk. At the same time banks started to apply real world income and expenditure measures.
All of the above are facts.
The reasons are either to ensure the survival of our banks or to slow an overheated sector of the economy. Both worthwhile endeavours. However, as in any broad application of regulatory policy, there are unintended consequences. These consequences manifested themselves in both the retail funding sector (in home loans) and in the commercial funding sector – where it was almost impossible to get a loan without property security.
As is always the case some entrepreneurial funders have recognised the niche in this market segment and have used their access to cheap private funding to fill this gap. Albeit at a considerable price. If you’ve struggled to get funding from a bank and your risk is acceptable, we can find you funding but it won’t be cheap. If you still have a notion of funding rates at 5% for your venture, close your doors and try something else now.
Right now, there are funders providing senior debt at rates between 8 – 20%. Most will be funded at 15% with around a 3% up-front fee. That’s for a 12 month period. This has been going on since the GFC.
Now this cosy little earning stream is facing some competition. No not by Fintechs (please) but by the potential entry of large swathes of funding from Asia looking for a home in Australia. The Asians like Australian risk and they love our rules and regulations. Initially they were looking to enter the market to help fund the non-resident home loan market. Now, a few are looking at the massive gap left by the local banks in the SME sector. It could be a fishing exercise but there are some serious hooks being baited.
Let’s just hope that someone takes one for a run.