The GFC is now abating and the thought of recession is receding. As the world economy recovers, Australia has weathered this global recession in relatively good shape compared to its contemporaries. What is clear is that we all learned something about our businesses, how interconnected the world economy has become and the clear importance of balancing robust regulations and free market theory. No industry has been and will be certain to change more from this economic shock than the banking industry. So, how might business banking change and what does this mean for you as a small business owner?
What did we learn?
There are a couple of fundamental things that we learned as a banking industry that are important to highlight:
Banks are a critical part of the economy: Without a strong banking system, we have learned that entire economies can be put to a halt and that many issues that impact Wall Street can have significant effects on Main Street. Banks provide financing to help purchase homes, create businesses and increase economic investment. It is an integral part of the any economy. Business banking is a critical component because we have the local responsibility to help businesses grow, which in turn drives employment and economic growth.
Understanding leverage: Due to historical low interest rates and increasing larger demands for credit, banks increased lending aggressively in many global markets prior to 2008. This resulted in aggressive lending standards, increased risk in the system and overleveraged economies. Banks are now requiring higher reserves to ensure that they have adequate capital to support this asset growth. Small business owners have learned to become more prudent on their use of loans to ensure that they allocate their capital to get the best returns and have the ability to service their obligations more comfortably.
How will business banking change?
In a rising interest rate environment, small business owners can expect the cost of credit to increase. This is clear as the RBA has had six consecutive increases to the overall cash rate, which makes funding more expensive for banks. This may result in more pressure on small businesses’ loan expenses as rates for commercial lending goes up. The good news will be that access to credit will increase as banks weather through the losses of the global recession and begin increasing lending to businesses.
Customers and banks will have to go “back to the basics” in terms of lending where customers will have to prove they are a good credit risk to get the best rates and terms of their commercial loans. The following are critical areas of consideration for small businesses who wish to get the best rates and terms. My tips for small business owners to consider when applying for a loan are as follows:
- Character
What does my credit look like? Maintain a clean personal credit profile to avoid difficulties in accessing credit.
- Capacity
How will I repay the loan? Establish a good deposit or transaction history with your bank to demonstrate strong cashflows.
- Capital
How much of your own capital do you have invested? Showing that you are committed to your business venture shows your financial commitment.
- Collateral
What forms of repayment can I repay the lender? For larger loans, showing hard assets will help support your lending needs.
- Conditions
How will the money be used and under what circumstances? Is the use of the capital logical, reasonable and prudent? Show your bank that the capital is being used effectively and they will be willing to lend more.
Several banks worldwide are also increasing their focus on customer service and responsible lending. Most banks will have a stronger focus on the customer to ensure they increase market share as the economy recovers.
What is the future?
- Increased regulation focus
Banking will enter into a new landscape of stronger regulation and oversight from Government to both protect the customers and reduce the risk of systemic failure to the overall economy. This will result in stronger compliance measures, responsible lending and stronger customer advocacy focus from banks.
- Think global, work local.
The world economy is becoming a smaller place. It is becoming easier to conduct business worldwide through the growth of the internet, social networking and as global boundaries diminish; business bankers will need to provide the products and services targeted to the global customer. As the world economies recover, customers will demand more and more from their bankers to facilitate transactions cross border.
- Government and business
Due to the financial crisis and the global recession, most governments (China, US, Europe, Australia) have provided significant stimulus to their economies with a focus on job creation and business support. The Australian Government, over the past 18 months, has provided support to help small businesses.
How it affects you, the business owner
There has been no better time to start a small business. There remains reason for optimism for the aspiring entrepreneur due to the following:
– Global pricing being at record lows
– Dislocations in almost every industry
– Business banking focus
– Economic recovery.
If you are an existing business and have been able to weather the GFC, it is most likely that you have streamlined your cost structure and maintained competitive position in a very difficult environment and are positioned well for growth. Now would be great time to engage your business banker to seek opportunities or develop plans to capitalise on these opportunities.
The business banking industry will have a stronger focus on the customer and have a view on growth as the economy continues to recover. Business customers are in the prime position as banks will fiercely compete for customers whether through leading customer service, product innovation or global servicing.
In summary, the way business banking is conducted will change over the next couple of years. We have learned a tremendous amount over the past 18-to-24 months from the GFC and its impact globally. With stronger regulations, increased focus on the customer and global recovery growth, the small business customer is positioned well for the future.
–James Balagot is Head of Business Products, Citibank.
