Efic doubling SME support over three years

ONLY 14 per cent of bank lending today goes to business to enable it to invest, and the businesses that suffer most are small businesses. “The world has changed,” says Efic’s Managing Director, Andrew Hunter . . .

Australia’s export credit agency, Efic, will double its support to small to medium sized exporters over the next three years, bringing badly-needed financing to a sector often overlooked by the large commercial banks.

Since refocussing its lending policy, Efic has increased support to SMEs from AUD42 million in 2013-14 to AUD154 million in the current
financial year. In three years’ time, it expects support for SMEs to reach around AUD300 million annually.

Andrew Hunter, who took over three years ago as Efic’s Managing Director, prioritised as his first task a review of the organisation’s corporate strategy. “I wanted it to be relevant to the market it served,” he told ATI.

“The first thing I did was assess where the commercial export opportunities were, and those sectors which were not receiving funding. We found two areas not adequately serviced by the private financing market — SMEs, and exporters who wanted to do business in emerging and frontier markets. 

“Both were perceived to be high risk.”

Hunter says SMEs tend to lack collateral, and their businesses are typically growing at a far greater rate than their balance sheets. “Typically, commercial banks test their quality of collateral rather than the quality of their business,” he says.

“While banks can get a charge over the assets of a business, they place no value on the inventory that SME exporters create, manufacture and then export to another country.

“Another problem, from the perspective of banks, is that exporters run risks which are not present in the domestic marketplace. There are currency fluctuations and the laws and business practices of a foreign country. So domestic banks tend to shy away from SME exporters.”

The lesson of the strategic review was that there is a substantial gap in the market, with SMEs and exporters particularly struggling to get working capital.

Hunter quotes Adair Turner, ex-Chairman of the Financial Services Authority of the UK, as saying that, today, only 14 per cent of bank lending goes to businesses to enable them to invest.

The statistics in the UK are very much the same as in Australia. Banks are focussed on lending for residential and commercial real
estate — and less for business, he says.

“The businesses that suffer most are small businesses.

“The world has changed. In the good old days, when I was growing up, banks were all about taking deposits to lend to business.”

The Swiss investment bank, UBS, released a report recently showing that the number of Australian exporters increased by nine per cent between 2013-14 and 2014-15. Most are small businesses exporting goods worth less than $1 million.

Says Hunter: “What these small companies are looking for is quick service and a simple product to access online. We are using digital technology to assist in evaluation and approval to provide a quick turnaround for applicants.”

He agrees that, administratively, it is hard to lend in small amounts to a large number of borrowers and to get a decent return on the capital.

“That is why banks focus on the low-hanging fruit. The easiest thing to do is lend $100 million, charge a one per cent fee and earn a three per cent margin on the loan. The cost of writing that business is relatively limited,” he says.

“In contrast, small loans are fiddly, and lenders need a technological solution to enable them to make a return from small loans to SMEs. To date, they seem not to have found a solution.”

The banks’ market loss, however, is Efic’s gain, because it has opened a funding gap for Efic to play in.

“In the last three years, we have provided AUD350 million worth of support to SME
exporters. This year, we will do almost AUD160 million. And I expect over the next three years, we will double the amount lent to this group of borrowers.”  Hunter told ATI.

When it comes to creditworthiness, he says Efic’s experience with SMEs has been good. “In 2014-15, we didn’t have a single default among our SME exporters. This year is a little more challenging — we are talking about two, three or four defaults. (But) we wrote AUD160 million of business and we have less than AUD2 million in defaults.

“This reflects that Australian exporters tend to be among Australia’s best companies. That is why their credit performance is so strong.”

Hunter says Efic works on a fundamental premise that if you are an exporter, by definition you have to be good at what you do.

“Businesses don’t export unless they are successful domestically. One would hope that if you have failed in the domestic market, you won’t try to take your products to another country. We find that our best companies are the
exporters.

“Specifically, we try to help an exporter who has secured an export contract. To win the contract, an exporter usually has to compete with the world’s best. Then they need working capital to complete the contract.”

Hunter says Efic looks for a clean company credit record, and the same goes to the record of the Directors of those companies. It also assesses the borrower’s history of exporting.

“If they tick all those boxes,” Hunter says, “that is good enough to satisfy our requirements.”

Efic lends to a spread of companies, such as wine exporters, healthcare product manufacturers and premium food producers. It is also prepared to stretch its loan terms to match production cycles.

“For example,” he says, “we provide the working capital to wine producers from the time they prune the vines through to when the grapes are picked and crushed and the wine bottled. The cycle takes 12 months.”

Another example of the type of company that can win Efic’s support is a Queensland-based tourism firm. Tourism is benefitting from depreciation of the Australian dollar.

Hunter says Australian premium food and beverages are very much in demand with
the growing middle-class in Asia. Similarly,
demand for healthcare products is growing.

“We recently provided working capital to a company called CarePlus, which sells vitamins through Alibaba, the Chinese e-commerce platform. CarePlus simply could not get the working capital it needed to source the materials required to manufacture products for the
Chinese market.”

Efic provided an AUD300,000 export working capital guarantee facility to the company’s bank, allowing the bank to release funds as needed to CarePlus to support prepayment of stock and freight costs associated with its
rapidly-expanding business.

With a significant proportion of cash flow tied up in inventory, as well as suppliers often
requiring payment in advance of goods being dispatched, CarePlus needed additional working capital to deliver on orders and to continue to grow. 

Creative companies and manufacturers of advanced materials are other examples of SMEs benefitting from the Efic umbrella.

Hunter says new technology has made it possible for many more SMEs to export — something that would not have been possible five years ago.

Bilateral free trade agreements between Australia and China, Japan, South Korea and other countries in the region have also helped pave the way for SMEs to export. These agreements, he notes, create a more level playing field for Australian exporters.

With its change in strategy, Efic no longer supports large Australian resource projects
because, Hunter says, large Australian corporates are well serviced by commercial banks.