Building success: tradies deserve support from banks. Photo: Glenn Hunt
MANY readers would be aware of the relationship between risk and price when it comes to bank loans. That is, the higher the risk that you won't pay back a loan, the more you pay in interest. This is what lenders call the ''risk curve''.
Unfortunately for the productive sector of this country, business owners have endured 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, which is backed by their residential property. And fully drawn business loans, with residential property as security, are not as expensive as an overdraft but they are still priced above the standard variable rate on your mortgage.
Let me put it another way: by taking the best security possible, the banks are virtually de-risking the overdraft they write for their business customer. Their risk is the same as the risk they take on the mortgage.
Yet, having taken the property as security - something most business owners hate to do - the bank then re-prices the debt facility so that it costs 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 the banks give for this practice, and they all do it. They say that business overdrafts involve higher administration costs, that the loan amounts are too small, and that business owners have greater income volatility than employees.
There is also the fact that every year about 13 per cent of business entities exit the arena, and 13 per cent enter it. However, as the banks know, the vast majority of the exits are orderly, with no money owed to a lender.
The technology now exists to reduce the administration 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 approach. First, 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 per cent.
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. The lending system is skewed against experienced business people and towards people with a year's worth of pay slips.
This is what I mean when I say that the business premium is really a punishment for not being an employee.
It is particularly troubling when you consider how penalised some sectors are. For instance, the Bureau of Statistics consistently flags ''construction'' as the most popular sector for Australia's 2.1 million businesses. Mostly, this means tradies.
These people often 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 family home as security.
Not only do I think this is unfair but it makes no economic sense. At a time when many economic commentators are asking for an honest debate on national productivity, we are hobbling the small-business sector, which accounts for 95 per cent of all Australian businesses and which employs more than half of the total workforce.
When you look at how an economy operates and how it could do so more efficiently, these premium charges for business finance are a logical place to start. Especially if there does not seem to be a reason for the premium in the majority of cases.
Now, like many business experts, 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 is up to the borrower to make the decision.
Mark Bouris is executive chairman of Yellow Brick Road Wealth Management. See ybr.com.au.