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A decreasing rate of home ownership could lead to a “major transition” in how Australia’s small business sector is funded, recent research has suggested.
According to SME lender, Scottish Pacific, if millennials never purchase their own homes it could potentially “shake up” the country’s tradition of SME owners using their family home as security to fund their business.
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With Australia’s home ownership rate trending downwards, Scottish Pacific CEO Peter Langham remarked that millennials looking to start businesses will need to “seriously consider” how to fund growth if they are locked out of the real estate market.
From an all-time high of 71.4 per cent in 1966, the country’s rate of home ownership is currently at 67 per cent and projected to decrease to 65 per cent by 2020, according to the lender.
“Already a growing number of baby boomer and Gen X business owners in Australia are moving away from bricks and mortar as business security,” Mr Langham said. “They are turning to non-bank alternatives such as debtor finance and angel investors to fuel their growth.”
“With many millennials expressing a sense of futility about saving for a home and feeling priced out of the market, this will invariably impact the use of property as security for business working capital,” he explained.
“It’s an emotive topic, as seen by the recent ‘smashed avocado brunches versus home ownership’ debate, but for the SME sector this is a big underlying issue,” he added.
Mr Langham pointed out that currently many SMEs fund their business by bank overdraft using their property as security, and if future generations of SME owners do not own property, they will most likely need to turn to alternative methods to fund growth.
“Those businesses looking to banks for overdraft facilities have to have enough equity and are invariably asked to provide real estate security,” he said.
Mr Langham suggested debtor and trade finance as viable alternatives for obtaining funding.
“Both debtor and trade finance give the business improved buying power, which allows them to negotiate supplier discounts for early payment and to avoid having to offer costly settlement discounts,” he concluded.
[Related: Bank benefits from ‘avocado gate’]
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