Rising property values could see Australia’s SME owners return to the high-risk approach of relying on home equity to fund business needs.
The property market appears to have shrugged off the recent downturn. Over the three months ended 31 January 2020, home values rose 3.70% nationally and 4.2% across the state capitals[1].
On the face of it, this is good news for home owners. However, there is a potential downside to the sustained increase in property values: It can present potential risks for Australia’s 2.3 million SMEs[2], many of whom rely on home equity as a source of business funding.
Cameron Poolman, CEO of OnDeck Australia, explains, “We know that around eight out of 10 SMEs have business finance secured against the owner’s home[3]. And this may rise following the uptick in property values.
“The risk is that relying on home equity blurs the line between business and personal assets, and this can put an SME owner, and potentially their family, in financial jeopardy if the business fails.
Separating personal assets from the business
Rather than encouraging SME owners to stump up their home as security for business lending, OnDeck takes a technology-driven approach.
“We use advanced lending technology and analytics to assess an SME’s eligibility for finance,” explains Cameron. “This ensures SME owners and their families are able to keep their personal assets separate from business assets.”
Funding for the next generation of entrepreneurs
The approach used by OnDeck can be even more important for up-and-coming entrepreneurs, who simply may not have access to home equity at all.
As a guide, data from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) shows that over one in two (56%) SMEs are operated by Gen Y and Millennials.
Yet home ownership in this key entrepreneurial period of life (ages 25-34) has dropped by more than 30% over the past 25 years. For this demographic, the cashflow solutions provided by specialist SME lenders such as OnDeck, can be especially valuable to drive business growth.
Access to capital – a key road block for SMEs
OnDeck’s own research has shown that one in four small business have been rejected for bank finance in the past. This has driven growing awareness of alternative lenders such as OnDeck, and that’s a plus for the small business community.
“Lack of access to capital is the single greatest impediment that Australia’s SMEs face in their quest for growth,” notes Cameron. “So it is important that alternative finance options are on the radar of SMEs.
“OnDeck lets SMEs owners quarantine their personal assets, in particular the family home, from their business, and that can be a highly effective risk management strategy.”
[1] CoreLogic Hedonic Home Value Index, January 2020 Results, Issued 3 February 2020
[2]https://www.abs.gov.au/ausstats/abs@.nsf/latestProducts/8165.0Media%20Release1June%202014%20to%20June%202018
[3] Small business bosses use home equity as ‘piggy banks’ to keep doors open, AFR, 26 Feb 2018 https://www.afr.com/wealth/small-business-bosses-use-home-equity-as-piggy-banks-to-keep-doors-open-20180222-h0wh4d
