A new fund to provide small businesses with an alternative source of financing will be set up with a A$100 million contribution from the government.
The fund will have an initial investment capacity of more than $500 million, with the aim of that growing to $1 billion.
The government has agreed to terms with the four big banks - CBA, ANZ, NAB and Westpac - and HSBC to establish the fund, called the Australian Business Growth Fund. It will be formally announced by treasurer Josh Frydenberg at an Australian Chamber of Commerce and Industry dinner on Wednesday night.
Each bank will contribute $100 million and HSBC will put in $20 million. The government is also talking to other financial institutions to have them invest.
The fund was promised at the election.
It will offer established Australian small-to-medium enterprises in both metropolitan and regional areas patient capital and strategic support to help them grow.
Fund investment could be used, for example, by a small business to invest in equipment to expand its operations, or to extend into another state or region.
These businesses will be eligible for long term equity capital investments of between $5 million and $15 million, where they have generated annual revenue of between $2 million and $100 million and can show three years of revenue growth and profitability.
The fund’s investment stake will be between 10% and 40%.
This level is set to enable the business’s owners to maintain their controlling interest, while giving the fund adequate influence. The support provided will be non-financial as well as financial. The non-financial assistance will include strategic advice, mentoring, talent management and network referrals
The fund will operate commercially and be independent of the government and the banks that participate. Investment decisions will be made by professional managers and performance will be assessed on a fully commercial basis.
Participating banks will be able to refer customers to the fund when equity financing might be more suitable than debt funding.
Frydenberg said: “Small businesses are the engine room of the Australian economy and access to a range of funding sources, including equity, is crucial for a thriving SME sector”.
The government sees the fund as filling a gap in the market for small and family businesses, which need better access to patient capital to grow. Patient equity capital funds in the United Kingdom and Canada have shown the benefits of this type of financing.
In his speech Frydenberg will say that “with nine out of every ten jobs being in the private sector, it is critical that government and business work effectively together.
"An area of key focus for the government is backing small and medium sized businesses who together employ more than seven million Australians. These businesses are central to every sector of the economy”.
“While there are many important issues affecting small business, including regulation, tax, skills and infrastructure, one that is also front of mind is access to the necessary capital to enable the business to innovate and grow.
"It is a point acknowledged by the Reserve Bank who has said of small business ‘it is not the absence of entrepreneurial spirit, it’s the absence of entrepreneurial finance that’s been the main factor holding that part of the economy back.
"This is echoed by SMEs themselves, with 35% of respondents in November’s Sensis survey saying it is relatively difficult to access finance”.
Authors: Michelle Grattan, Professorial Fellow, University of Canberra