Many young entrepreneurs are unable to get bank loans and are increasingly relying on the “Bank of Mum and Dad”, putting retirement savings at risk.
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Small business and family enterprise ombudsman Kate Carnell highlighted the problem last week as she launched a study into factors impacting small to medium enterprise investment.
She said that despite bank executives’ claims that lending to small business firms was booming, young people were missing out.
“Traditional bank loans are backed by real property mortgages and although alternatives are emerging, they are not currently mature and affordable,” she said.
“Young aspiring small business operators are particularly disadvantaged and increasingly rely on their parents to provide seed finance.”
Ms Carnell said borrowing from family might be convenient and flexible but it put peoples’ retirement savings at risk.
“It also raises social equity issues in that the children of affluent parents have greater opportunities to buy and grow businesses,” she said.
When 28-year-old Bendigo businessman Brenton Johnson started cloud storage provider Uptake Digital four years ago, borrowing from his parents was out of the question.
“I can’t get a loan and I’m not going to go to my parents and risk them putting their house on the line,” he said.
“It’s not really fair on them.”
Instead, Mr Johnson started his business using a credit card with a $15,000 limit.
“The interest rates on a credit card can be 20 per cent, whereas for a bank loan it could be seven to 10 per cent, depending on the rate,” he said.
Mr Johnson believed the Higher Education Contribution Scheme used by university students to finance study should be extended to young people starting businesses.
He said many young people chose to learn skills by starting businesses instead of going to university.
“Why can’t we extend HECs to give these people a leg up, rather than risking their parents’ houses?” Mr Johnson asked.
Ms Carnell called for a government-backed guarantee scheme similar to the British Business Bank.
The British Business Bank brought expertise and government money to smaller business finance markets, helping smaller operations start up, scale up and stay ahead.
The ombudsman’s study also took aim at red tape, calling for the expansion of a Parramatta program making compliance requirements seamless.
“It was found there were more than 50 pieces of regulation which applied to setting up a hospitality business in Parramatta and that the regulation meant it took up to 18 months to commence trading,” Ms Carnell said.
“Regulation wasn’t removed, but was instead sped up and made invisible. Information provided once was used to automatically complete forms in other areas of bureaucracy.”