Banking News

Westpac says cash flow has usurped assets for SME lending

(6 April 2017 – Australia) Speaking at the Australian Financial Review Banking & Wealth Summit, the chief executive of Westpac’s Institutional Bank, Lyn Cobley said the bank is increasingly assessing cash flow when lending to small businesses.

Cobley said the changes were coming amid disruption from technological advancements, and tighter business cycles providing news challenges for traditional lenders.

"Shorter and faster cycles are challenging business," Cobley said

"For banks, it impacts how we manage risk, where we should invest, our funding sources and how wealth is created. You cannot look at growth sectors and simply predict performance based on fundamentals.

"Banks need to pay attention to how well business leaders understand their strategy, are anticipating the life cycles of their industry and the shifts in their comparative advantage."

This was also changing the way the bank lends to small and micro businesses, where lending has traditionally been secured against assets such as property.

"Our lending decisions and risk management are increasingly based on cash flows rather than underlying assets," Cobley said.

"More and more companies today don't own physical assets. Their wealth is in intellectual property, human capital and their strategy."

Westpac’s switch follows insights from the latest round of the Scottish Pacific SME Growth Index which found that more than 90 percent of SMEs are unhappy about their cash flow, this issue is costing the sector a potential A$200 billion in lost revenue each year.

Scottish Pacific’s CEO, Peter Langham added that three-quarters of SMEs who identify as being in growth phase say better cash flow would have produced revenue growth of 10 to 50 percent in 2016.

“The unhappiness around cash flow is higher for growth businesses, as opposed to those with steady or declining revenue. It is cited as a major growth barrier by 56 percent of growth SMEs, but only by 20 percent of SMEs in a consolidation or declining growth cycle,” he said.