Business owners have traditionally endured a premium pricing on their overdrafts even when the security they put up is the lowest risk short of government bonds: residential property.
This has created the situation where a tradie or a retailer is paying 6.7 per cent for the mortgage on their family home, yet they are paying 9 per cent on their business overdraft. So the banks are virtually de-risking the overdraft they write for their business customer but then re-pricing the facility so it boasts a greater margin than is charged on the security itself.
In the case of the overdraft, almost twice the margin charged on your mortgage. There are many reasons given by the banks for this practice. They say business overdrafts involve higher administration costs, that the loan amounts are too small, and that business owners have greater income volatility than employees. However, the technology now exists to reduce the admin costs of business lending; and the volatility of business owner income is precisely why they need working capital.
So, in reality, the ‘business premium’ is a penalty on the business owner for not being an employee. I have a problem with this. Firstly, the security is the security. If the security you take on a business is residential property, then that is the security. And residential property risk is valued by the market at 6.7 per cent, not 9. I’m also troubled by the mentality where a bank says it has more concern about a business owner who has been trading successfully for 20 years, than it does with a person who has had a job for 13 months.
It’s particularly troubling when you consider how penalised some sectors are. Construction is consistently the most popular sector for Australia’s 2.1 million businesses. Mostly, this means tradies. These people experience tight cash flows because they carry overheads on shorter cycles than they can bill a client. Your average tradie has to pay employees, buy materials, run vehicles and pay insurance on shorter cycles than they are paid.
Yet they can also generate large annual incomes through early starts, long hours and working weekends. To carry this, they need working capital – an overdraft, typically – and they pay a premium rate even though they put up their home as security. This is unfair and makes no economic sense: small business accounts for 95 per cent of all Australian businesses and employs more than half of the work force.
When you look at how a national economy could operate more efficiently, premium charges for business finance are a logical start. Especially if there’s no reason for the premium in most cases.
I believe there is room for change in the method and the pricing of business debt. Powerful technologies, new funding arrangements and an innovative product will give business owners more choice. However, as in any competitive market, the lender can only offer a product at a certain price: then it’s up to the borrower to make the decision.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on firstname.lastname@example.org with any queries you may have or check www.ybr.com.au for your nearest branch.