Daily Bulletin


  • Written by Isaac Gross, Lecturer in Economics, Monash University

The government has widely touted its support for small businesses – most notably the provision of loans subsidised by the Reserve Bank.

In its economic update on Friday the Reserve Bank talked up its low-cost Term Funding Facility. Take-up was “increasing steadily”.

The scheme gives banks ultra low-interest money (0.25% per year for three years) on the understanding they will lend it to households and businesses that need it.

The first allocation was a proportion of each lenders’ loan book. The second was conditional on the the lender expanding lending to business.

Read more: More than a rate cut: behind the Reserve Bank's three point plan

For every extra dollar the bank extended to large business, it would get one extra dollar of funding from the Reserve Bank. For every extra dollar it lent to a small or medium size business it would get an extra five dollars.

Yet the official figures suggest that the overwhelming bulk of the new money has gone to big businesses, those with turnovers of more than A$50 million per year.

Medium-sized businesses have barely got a look-in. Lending to small businesses has actually gone backwards.

Outstanding credit to businesses

Small businesses are being starved of funds: here's how to make their loans cheaper Index. 100 = January 1, 2020. Reserve Bank of Australia

Loans outstanding for big businesses are 7.4% higher than at the start of the year, loans outstanding for medium-sized businesses are just 1.3% higher, and loans outstanding for small businesses are down 0.6%.

Not only have banks channelled the overwhelming bulk of their new lending to large businesses, they have also done so at lower interest rates.

Credit spread reductions for businesses

Small businesses are being starved of funds: here's how to make their loans cheaper Percentage point change in spread between cash rate and rate charged from February 1, 2020. APRA

Why have small businesses missed out? One explanation might be that they are not interested in borrowing.

However, ask any economist, and she will tell you that demand for a good is usually a function of its price.

This ought to be also be true for business credit. The Reserve Bank says small businesses are being charged as much as 4.5%.

If the interest rate was lower there is a fair chance the amount borrowed would rise.

Banks don’t think they’re worth the risk

Small businesses are being starved of funds: here's how to make their loans cheaper Banks don’t like the risk. Shutterstock

Another explanation might be that banks don’t see much profit in lending to small businesses. Start ups are risky, even more so in a recession. But the Term Funding Facility was specifically set up to counter this.

Unfortunately it has proved inadequate to the task. The Reserve Bank’s offer of a three year loan fixed at 0.25% has not been generous enough to appeal to a banking sector whose cost of funding from traditional sources has also plunged.

What can it do to re-calibrate the Term Funding Facility? It is is due to expire in January and will need to be extended in one form or another.

They might if the money was free

One solution would be to take a leaf out of Europe’s book and make the interest rate on part of the next phase of the program negative, essentially free money.

The European Central Bank’s scheme offers loans at rates as low as -1% to banks that are willing to expand lending to small and medium-sized businesses.

This offer has helped drive the interest rate faced by small and medium-sized businesses as low as 2%, well below the 4.5% sometimes charged in Australia.

If the Reserve Bank offered part of the Term Funding Facility at a negative interest rate for banks that expanded lending to small businesses, it would likely see some expansion.

Read more: 'Yield curve control': the Reserve Bank's plan for when cash rate cuts no longer work

It would both help stimulate the economy and increasing financial stability by making small business failures less likely.

Some might argue against this by saying that negative interest rates are unprecedented in Australia. But this argument does not hold water.

The times, and almost every proposed solution to our current problems, are unprecedented too.

Authors: Isaac Gross, Lecturer in Economics, Monash University

Read more https://theconversation.com/small-businesses-are-being-starved-of-funds-heres-how-to-make-their-loans-cheaper-143834

Writers Wanted

Why some people find it easier to stick to new habits they formed during lockdown


Why is it worth playing at an online casino?


What is Self-Education? + 4 Ways to Improve Yourself


The Conversation


Prime Minister Interview with Kieran Gilbert, Sky News

KIERAN GILBERT: Kieran Gilbert here with you and the Prime Minister joins me. Prime Minister, thanks so much for your time.  PRIME MINISTER: G'day Kieran.  GILBERT: An assumption a vaccine is ...

Daily Bulletin - avatar Daily Bulletin

Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Scott Morrison: the right man at the right time

Australia is not at war with another nation or ideology in August 2020 but the nation is in conflict. There are serious threats from China and there are many challenges flowing from the pandemic tha...

Greg Rogers - avatar Greg Rogers

Business News

Cybersecurity data means nothing to business leaders without context

Top business leaders are starting to realise the widespread impact a cyberattack can have on a business. Unfortunately, according to a study by Forrester Consulting commissioned by Tenable, some...

Scott McKinnel, ANZ Country Manager, Tenable - avatar Scott McKinnel, ANZ Country Manager, Tenable

InteliCare triple winner at prestigious national technology awards

InteliCare triple winner at prestigious national technology awards Intelicare wins each nominated category and takes out overall category at national technology 2020 iAwards. Company wins overal...

Media Release - avatar Media Release

Arriba Group Founder, Marcella Romero, wins CEO Magazine’s Managing Director of the Year

Founder and Managing Director of the Arriba Group, Marcella Romero, has won Managing Director of the Year at last night’s The CEO Magazine’s Executive of the Year Awards. The CEO Magazine's Ex...

Lanham Media - avatar Lanham Media

News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion