What is stifling the growth of Australian small businesses?

Most Australian SMEs are relying on profits and earnings – rather than external funds – to bankroll growth and expansion.

According to longitudinal data collected from 265 CEOs of small and medium companies who have attended the Australian Centre for Business Growth’s programs, the majority of SME owners and managers are not using external sources of funds to grow.

Of those surveyed, 86 per cent are using profits to fund growth, less than half (42 per cent) are using bank loans, one in three (34 per cent) are accessing government grants/incentives, and only seven out of 100 (7 per cent) are securing equity investments. Over half (53 per cent) of the companies in the study are medium-sized (20 – 199 employees) and 41 per cent are small (5 – 19 employees)

There are many reasons why SME owners and managers are not accessing external funds for growth. Some are fearful of growth. Others don’t know what to do to grow.

Many are satisfied with their current size. Others are afraid that if they borrow money and can’t pay back the loan, they’ll end up in liquidation.

“We need more SME owners and managers to want to grow and to understand how to grow.”

Most don’t know what’s required to get an equity investment, or fear that an outside investor might find them lacking and replace them.

But perhaps the biggest reason that the SME owners and managers expect to fund future growth off their balance sheet is because that’s how they did it in the past – and they really don’t understand the alternatives.

Given that the companies participating in our longitudinal survey are growing at an average rate of 12 per cent per year – four times faster than the Australian economy – that strategy appears to be working.

But that strategy will not enable them to accelerate growth in the future – they’ll need more money than profits can provide.

So if we want more companies to scale more rapidly, we need to provide additional sources of capital, educate SME owners about how to grow, and the pros and cons of various options to finance growth.

Years ago people thought they had to save the full cost of a house before buying it. Today, most people make a down-payment on a house and borrow the rest from the bank.

This change in how we finance home ownership didn’t just enable more people to buy homes; it had a positive impact on multiple industries and

The analogy holds true for companies. If they have to fund their growth through profits (savings) and learn how to grow through the “school of hard knocks” (experience), our economic growth will stutter along at 2.2 per cent to 2.4 per cent a year.

But if we deliver more growth programs that provide SME owners and managers with the “know-how” and confidence to grow, they will want to grow, and they’ll need debt and equity options to do so.

The federal government recently introduced a Business Growth Fund, similar to those introduced by the UK and Canada.

In Canada, the aim is to provide an option for businesses that “need a capital partner but want long-term alignment around control, strategy, and exit horizon”. Initial investments range from $3 million to $20 million in exchange for a minority stake in the company, with the ability to make follow-on commitments over the life of our investment.”

The UK’s Business Growth Fund has invested $2.7 billion ($5 billion) in a range of sectors across the economy since 2011. Initial investments were typically between £2 million and £10 million, with follow-on funding to support new growth opportunities. The fund also offers broader support to companies they invest in – from commercial insight, interim leadership, to a seat on the board.

The Australian Business Growth Fund (BGF) has a goal of growing to $1 billion as it matures. ANZ, NAB, CBA and Westpac have each committed $100 million to the fund, matching the federal government’s pledge, and HSBC has said it will contribute $20 million.

Established Australian businesses which meet the fund’s growth and revenue criteria will be eligible for long-term equity capital investments of between $5 million and $15 million.

The Australian BGF’s investment stake will range from 10 to 40 per cent, so business owners can maintain control. Like the UK BGF, it also proposes to offer non-financial support such as strategic advice, mentoring, talent management and network referrals.

The Australian BGF comes at an opportune time for small and medium Australian companies.

But in order for this funding stimulus to work, we need more SME owners and managers to want to grow and to understand how to grow, how to lead and manage executive teams, select and retain awesome people, put the right systems in place, choose the right strategy, market and sell to the right customers, develop a growth plan, and practice the discipline of execution.

With more education and access to more funding, we can expect increasing numbers of companies to grow, more jobs to be created, and our GDP growth rate to accelerate, as well.

Dr Jana Matthews
Sydney Morning Herald
Original Article