1. Aus. Industry Accelerating Commercialisation;

This is difficult for SMEs to access due to the upfront 50% cost, administration and time commitment for an uncertain outcome, as they are competing against large companies with professional resources for limited funds.
• This program is very complicated and time consuming to access.
• In the last few years it has been shut down and reworked twice.
• The $ for $ funding requirement makes it almost impossible for startup SMEs to commit to the program as there is little or no spare money to commit to this $ for $ funding.
• The Entrepreneur, without a visual presentation, and questions and answers, is reliant on their most often nonprofessional application and written business plan.
• Larger organisations on the other hands can afford to establish Grant Departments with specialists in the grant application process. They are most often successful.
Many SMEs simply cannot commit to seeing the process through.

Solution

Establish a separate grant for SMEs
• which is simpler to apply for,
• is capped to a lesser amount,
• relies on nil or less capital injection from the SME.

2. The Export Market Development Grants (EMDG)

This scheme is a key Australian Government financial assistance program for aspiring and current exporters. Administered by Austrade the funds are restricted and come far too late. Instead of providing grants the government should provide this funding to insure Letters of Credit loans.

Solution

Irrevocable Letters of Credit (LCs) should be acceptable as collateral or security. A letter of credit has greater substance than property and is a short term arrangement on an order by order basis. The amount loaned by a bank against an LC is the cost of production or milestone of an order. The profit is received upon completion when the product is delivered and the money transferred bank to bank.

In Australia SMEs tend to be localised and therefore are usually highly competitive. To be successful and maintain their competitive edge these businesses have developed strong strategic advantages. Provided with the opportunity, these advantages could be exploited in broader markets.
An important market that only requires a shift of focus is that of export. Following the example of the Singapore government, money would be more accessible with a reduction in the reserve on legitimate and irrevocable letters of credit for export orders.

An irrevocable letter of credit is common in export trade and provides the “irrevocable” security against the financing. All it takes is a shift in mindset. Companies will follow the easier money and Australia’s focus would soon become export oriented, led by SMEs who will react quickest.

3. Income Tax Research and Development Grant

The Income Tax Research and Development Grant is currently the most effective program the Government runs. The application process requires a significant input from the business and the engagement of specialist accountants. This can be expensive and so prohibitive to Small to Medium Enterprises (SMEs).

A business spends the money and receives a rebate once the tax return and application is lodged. Therefore, there is a delay in receiving the rebate (money) of over 12 months if expenditure is incurred in July and the return is lodged in the following July/ August and rebate is received in September.

Solution

Provide the grant for SMEs only at the beginning of a year set to a plan with periodical milestones. This grant is adjustable at the end of the year’s tax.

4. Private Investment

Stock Brokers, Investment funds, Banks, Insurance Companies, Financial Planners, Accountants, Financial Advisors and Lawyers are all risk adverse. They no longer introduce their High Net Worth Individual (HNWI) clients to business opportunities with startup SME,s due to the perceived legal liability of making such a referral. Accordingly, HNWI get funneled in to main stream top end of town managed funds and the share market. They focus on established investment products in the most part around the traditional Cash, Bonds, Shares, Managed Funds and Compulsory Superannuation.

Solution (1)

There needs to be more flexibility in company structures. The Propriety Limited Company (P/L) is the common SME vehicle and in today’s world has far too many rules and regulations to follow and report.
Today companies can fail to survive in an ever changing, critical, financial environment, sometimes with that financial damage created by external implications including Government (I give you the Solar and Insulation Schemes as well as the Cattle Freeze to Indonesia).

If a lender (bank) re-evaluates the security of the business and appoints receivers, they (the receivers) are under instructions by law to sell off everything they can as quickly as they can to retrieve as much as they can for the lender. There is no consideration for the owner even though the cause and decision was out of their control. The small business owner is not supported nor protected but destroyed.

If the business hits difficulties, there should be a mechanism to save or restore it. The owners should be given time to restructure, if possible. A Small Business Charter would provide new rules of salvation by establishing structured safety nets for struggling businesses and implementing business generated recovery programs. At the moment Governments are doing that all over the country for big business.

A P/L was originally established to protect the business creator, the limit of the paid up capital being the total exposure of the business. This does not happen anymore. All credit is joint and severally guaranteed by the Directors. The banks secure the business with the personal property of the Directors and the Taxation Department holds the Directors responsible for the company debt.

The exposure is so open, now, that it is difficult to attract investment from professional investors who do not want Board exposure. P/L s are also too restrictive for private investment. The restriction to attract broader investment and the inability for shareholders to exit, are two of the biggest constraints.

We need to change the rules of the private company back to the original intention. We need to protect entrepreneurial spirit and focus should be on support for the small business person, to assist them. The company model should be so structured as to invite investment.

Solution (2)

The new Tax Laws Amendment (Tax Incentives For Innovation Bill 2016) is an excellent program but has a number of barriers.
• It places single investment pressure on individuals
• It has time lines that lock out some companies.

An additional investment vehicle that removes these barriers would be the establishment of a fund or funds that individuals could place their capital and still receive the 20% rebate. The fund would establish a charter for applications and for lending that is less constrictive.

5. Tax

Small business has to provide the same taxation activities as Telstra or BHP. A one person or even a five person company has difficulty in building and operating a successful business without the imposition of non-profitable, complex and difficult, multiple, government tax collection activities.

If they make mistakes they are not only fined heavily but hounded by the tax department as if they were major criminals. They have no money to fight, so of course they capitulate. They are easy prey.

Solution

Small businesses should have a simple one tax treatment in a package which removes the daily, weekly and monthly load and allows for a professional accountant to bill an acceptable fee annually. This single tax system would be calculated and established as a capped sum across the size and performance of the business, measured by employment numbers, turnover and profit.

6. Significant Investor Visa – Program.

In theory this program sounded good, but it has a few basic flaws. The funds were supposed to go to assist businesses, but large financial institutions and lawyers (immigration specialist) created managed funds and loaned these funds back to the applicants to purchase property, not invest in business.

Very little has gone into business, rather it has been channeled into Property. Funds were not able to be invested into Public Unlisted entities. Foreigners investing into Pty Ltd companies and their advisors have been nervous as these entities suffer from the information provided in Section 4 above. “The exposure is so open, now, that it is difficult to attract investment from professional investors who do not want Board exposure. P/L s are also too restrictive for private investment.” Further, there is no established market for the shares of Pty Ltd entities.

The Risks for SMEs

Small to medium business is usually all about growth and struggle. These entrepreneurial leaders strive to take a business from a start up to a size that maintains a life style they envisage or to a point in the market where it can be sustained or grow with a reasonable degree of ease.

To get there the owner/s mortgage their house to provide the funds to start and or to grow the business. They take as little salary as possible, they lease a business property, machinery, equipment and a car. They establish supply lines on credit to support the business. They offer credit to their clients, they collect taxes on behalf of the Government and they employ a huge number of the private sector work force.

In good times the business stays healthy and the business owner/s generally cover their costs and plow the profits back into the business.

At no time have they any opportunity of providing a financial reserve when the market downturns. When the business collapses the business owner/s are fully exposed.

Different to an employee who may sadly lose their job, the business owner/s not only lose their job but are fully exposed to the borrowings against their home, the leases and the creditors debt as well as possible client bad debts. This can be an overall debt too high to repay. (Disturbing statistics of this are emerging now.)

Government Attention

Government and big business do not understand SMEs. Most government employees who set the rules or impose the taxes have never worked in the private sector nor had to worry about where their next pay packet was coming from. They have never taken into consideration the impact of new regulation, rules, taxes and costs on the SME sector and of course do not understand price point.

They don’t have any idea of controlling the monopolies that control our retail dollar especially the major SME needs of electricity, petrol and food. It is against the law in the USA to have such monopolies but not in Australia and the impact is massive.
In Australia there is a fundamental misallocation of capital to the property and the stock market. SMEs have difficulty raising equity funding, so are forced to encumber real estate assets at high interest rates, from banks. This establishes them as a high risk investment.
There is an urgent need for a national focus on major policy changes to support SMEs. These changes should be aimed at attracting and stimulating investors to invest with SMEs. It has become very difficult for an entrepreneur to start and grow a business in Australia.

Dunn and Bradstreet Reports

The number of failed businesses in Australia has increased by 7.8 per cent in the first quarter of the year, (2015) compared to figures from the first quarter of 2014.

The number of failed businesses in Australia jumped by 17.7 per cent in the third quarter of the year, (2015) compared to figures from the third quarter of 2014. The latest figure marks the highest rate of business failures recorded over the past two calendar years.

The number of failed businesses in Australia fell by 10.6 per cent in the fourth quarter of 2015, down from a two-year high in the previous quarter.

The number of failed businesses in Australia increased by 7 per cent in the first quarter of 2016 compared to Q4 of 2015. On a year-by-year basis, business failures were up 5.2 per cent.

From Australian Bureau of Statistics

June 2013:
• There were 2,079,666 actively trading businesses A decrease of 61,614 (-2.9%) businesses from 2012.
• The entry rate (11.2%) of businesses was lower than the exit rate (14.1%) and had decreased by 2.3% after a decrease of 0.4% in 2011-12.
• The exit rate of businesses increased by 1.0% in 2012-13
• Of the businesses operating in June 2009, only 62.9% were still operating in June 2013.
Of the new business entries during 2009-10, only 47.5% were still operating in June 2013.
June 2015:
The number of actively trading businesses in the market sector (2,121,235) had increased by 1% from June 2014 levels.
While there were slight reductions in the number of business entry and exit rates in 2014-15 from 2013-14 (business entry rate 13.7% to 13.4% and business exit rate from 12.7% to 12.4%), it is the second consecutive year that business counts increased by 1%.
“Although there was actually a small drop in the number of new business registrations, fewer businesses closed, giving a total rise of one per cent in business numbers – an additional 21,000 businesses for 2014-15,” said Mike Booth from the ABS.

The employment dynamics of Australian entrepreneurship

Luke Hendrickson , Stan Bucifal , Antonio Balaguer and David Hansell

Department of Industry and Science and Australian Bureau of Statistics – 2015
 This research paper investigates the employment dynamics of Australian entrepreneurship using the new Australian Bureau of Statistics’ Expanded Analytical Business Longitudinal Database 2001–02 to 2012–13, funded by the Department of Industry and Science.
 As firms age they contribute less to job creation and more to job destruction. Young firms in Australia contribute disproportionately to net job creation. Although employing a small fraction of the Australian workforce (15 per cent), young SMEs generated the largest share of total job creation (40 per cent) in the economy.
 For every 100 existing jobs in Australia in any given year, startups will, on average, add 5 jobs within the following three years.
 Over the period 2006–2011 we estimate that 1.04 million full time equivalent (FTE) jobs were added to the economy. Start-ups (firms aged 0–2 years) added 1.44 million FTE jobs to the economy whereas older firms (3+ years) shed around 400,000 FTE jobs over the same period.
 Most micro-start-ups (new firms with 0–9 employees) either exit or grow very little (96.8 per cent). A very small fraction (3.2 per cent) of these micro-start-ups grow dramatically over five years post-entry and these firms account for the majority (77 per cent) of total post-entry job creation of all micro-start-ups in their cohort. These high growth start-ups are found in all sectors of the economy.
 As expected the sales and profit performance of these high growth firms is superior to those that remain stable or only grow marginally after five years. However their labour productivity is lower during that period of dramatic employment growth and investment.

Prepare by Lionel Barden and Ian Howard
Small Business Policy
Small Business Association of Australia