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Cash flow trumps assets for SMEs seeking loans

12 July 2017

Post GFC, it’s become increasingly apparent that banks considering SMEs’ loan applications are more impressed by cash flow than assets, notably property.

 Australia’s most senior bank executives made it clear to April’s Banking and Wealth Summit in Sydney this year that they had been forced to look beyond industry fundamentals and traditional measures of growth to understand business life cycles in order to decide where and how they should lend and invest.

 Henceforth banks can be expected to take account of technological disruptions and shorter business cycles that create new challenges in lending.

 The Summit is seen by many business analysts to indicate banks have shifted their focus away from an era of rule making to genuine transformational change.

 Because the Australian financial services sector is both stable and profitable, Macks Advisory is advised businesses should this year expect to see new deliberate strategic choices made and exercised in the sector.


The tipping point was 2008


Following the collapse of Lehman Brothers in 2008 and the subsequent rise of the smart phone as a tool in making business decisions, banks are increasingly inclined to make their own decisions relative to risk management, particularly with loans, by examining companies’ cash flows rather than underlying material assets.

 CEO of Westpac’s Institutional Bank Lyn Cobley says SMEs should understand that the banks’ focus on making these sorts of decisions must be on how wealth is created.

 “Increasing numbers of companies today don’t own physical assets.  Their wealth is in intellectual property, human capital and strategy”.

 Ms Cobley says the digital revolution has sharpened Westpac’s attention to customer experience, especially regarding payments – how quickly businesses are paid for goods and services they provide, instantaneous payment being best for the quickest assessment of cash flow.

 She claims it’s no longer feasible for banks to look at growth sectors and simply predict a business’s performance on what once used to be regarded as fundamentals.

“Financiers are placing increasing importance on assessing how well business operators understand strategies available to their particular business, how effectively they are anticipating the life cycles of their industry, and how aware they are of shifts likely to occur in comparative advantages they may have.”


Where this fits in the big picture


SMEs having operators who understand this will be more likely in future to have loan applications approved – and if the International Monetary Fund’s (IMF’s) latest prediction is correct, then it’s also likely many of these operators will want to borrow money to fund expansion.

 The IMF’s forecast in the latest World Economic Outlook is much more optimistic than the detailed review of the Australian economy published in February, which was characterised as “mediocre”.

 Even as SA’s unemployment rate rose to 7.3% - the nation’s highest as other States’ unemployment figures were decreasing - the IMF’s prediction in May for Australia as a whole, was that unemployment would drop to 5.2% this year.

 The Fund forecasts that Australia’s economic growth will surge from, 2.5% to 3.1% this year and that there will be similar growth in 2018 when the nation’s jobless rate is expected to drop to 5.1%.

 In making its predictions, the IMF consults with Australia’s Treasury, and analysts suggest that the Fund’s subsequent growth estimates could be even higher as the Budget’s provisions take effect.

 Australia has not had two successive years of growth of 3% or more since the 2008-09 financial crisis.

 Although SA will be tagging along at the tail of this growth, there will be growth, and there will be companies needing loans to fund expansion, if not immediately, then in the not too distant future.  Operators who get funding will be those who understand how banks are now tending to assess loan applications.

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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