Banks are being squeezed by increasingly strict regulations such as Basel III, reducing financing choices for Australian businesses, highlighting a need for alternative solutions.
A raft of regulatory changes adopted after the financial crisis of 2007/2008 has strengthened the global financial system. But tighter rules mean corporate borrowers may not be able to access credit from traditional lenders as easily as they have in the past.
As a result, new options are needed so businesses can access the funds they require to operate their company and pursue growth strategies. But before looking at new strategies to access finance, it’s important to understand how the rules have changed and what that has meant for the lending market.
In 2015 the Australian Prudential Regulation Authority (APRA) introduced a liquidity coverage ratio (LCR) that means banks are required to hold a greater proportion of more liquid assets like cash and government bonds. This has led to a reduction in the volume of other assets held by banks, such as commercial loans.
Other similar regulations, for instance the Basel III rules, also mean banks must hold more assets like cash and bonds. This has also led to lower appetite for corporate loans among some institutions.
The Australian Bureau of Statistics’ (ABS) data supports this showing a 1.7 per cent drop in commercial finance for the year to 30 June 2016.
Finding suitable capital solutions
Research shows that as the lending environment has become increasingly challenging businesses have been looking to work with more flexible lenders.
According to Alleasing’s Equipment Demand Index (the Index), 53.0 per cent of corporates indicate lack of access to senior debt stymies their ability to replace new or existing assets, which reduces their ability to grow. Big business is hardest hit by this: for small businesses this figure falls to 34.9 per cent and 27.7 per cent of micro businesses say they can’t access bank debt to grow.
The Index also shows that for the two years from August 2014, the number of businesses purchasing assets outright has reduced by almost 50.0 per cent. Whereas, the proportion of corporations and government agencies that are using operating and finance leases increased, and continues to rise at a steady rate, with no signs of slowing in the near future. This is a strong indicator on how tough it is for many businesses to access the right funding solutions.
With banks scaling back lending and ever-tightening prudential regulations, new sources of finance are set to become even more important for Australian businesses as we progress through 2017. Non-bank capital solutions are one option for businesses and they are an option that can free up funds for other investments with the ability to provide a return.
Now that 2017 is upon us, this is the time for all businesses to consider their funding mix and make plans to ensure they have the correct funding options in place to secure growth opportunities as economic conditions continue to improve.