Following the Banking Royal Commission, it has been increasingly difficult for small businesses to obtain funding. This is making it harder for these businesses to expand. However, a new federal government initiative, the Australian Business Growth Fund (ABGF), aims to inject equity capital into small and medium-sized businesses in Australia. The initiative, launched on 27 November 2019, was delivered in collaboration with the four major banks and other private industries. This article will explain how the fund:

  • operates;
  • will distribute funding; and
  • will benefit businesses.

How Does the Fund Work?

The major banks (ANZ, NAB, Westpac and Commonwealth Bank) have each pledged $100 million towards the fund. HSBC and the Macquarie Group have each offered an additional $20 million investment. Finally, the Federal government has provided a further $100 million dollar investment. This means that the ABGF’s initial investment portfolio will be over $500 million. The intention is that the fund grows to over $1 billion. The fund will operate commercially independently from both the government and participating banks and will have its own board and management team.

The fund will provide Australian businesses with long-term equity investments of $5 million to $15 million over a period of five years. In exchange for this funding, the ABGF will acquire a 10-40% share in the company. This means that:

  • business owners will retain their controlling interest and benefit financially; and
  • the fund will maintain enough influence in the business to encourage and stimulate business growth and development. 

How Will the Fund Distribute Funding to Businesses?

To be eligible for ABGF support, a business must demonstrate:

  • consistent strong growth over at least a three-year period; and 
  • an annual revenue of between $2 million and $100 million. 

These criteria allow existing businesses with genuine potential to access funding which may have previously been difficult to obtain.

Australian businesses should be able to access the ABGF from 2020, once the bill to establish the fund becomes law.

How Does the Fund Benefit Businesses?

The primary benefit that the fund will offer small and medium-sized businesses is access to funding. Recent data has identified that investments in the $5 million to $15 million range are rare. However, investments of over $20 million have been plentiful. Many of these larger investments have gone towards financial technology startups.

The ABGF equity fund will offer a viable option for business owners who cannot secure finance against personal assets to grow their business. Similarly, those who have exhausted all avenues of secured finance may be able to continue their growth through the capital injections offered by the fund.

Second, it is uncommon for smaller businesses to maintain ownership and control of their businesses when accessing this level of funding. Therefore, maintaining control of the business is an additional benefit of accessing the fund. The fund will aim to support businesses as a partner, rather than a majority shareholder. 

Another key benefit is that the fund will offer access to:

  • an extensive knowledge network;
  • mentorship; and
  • the unique opportunity to create partnerships with the country’s leading financial institutions.

Expected Success

Similar funds in the United Kingdom and Canada have seen extraordinary success. The United Kingdom’s Business Growth Fund has invested over $2 billion in various sectors since its inception in 2011. The unprecedented success of similar programs in the United Kingdom demonstrates both the need and the viability of the ABGF in the current global economy. 

The announcement of the fund has also been welcomed by economists, including those at the Reserve Bank, who have acknowledged that one of the main factors preventing economic growth is the lack of affordable capital and the subsequent lack of growth in small business. 

Key Takeaways

The high cost of taking onboard external finance can deter business owners from expanding their business. Generally, these costs are due to the fact that investors assume the majority of the risk when financing new companies in the earlier stages of business development. The criteria that a business must meet in order to obtain finance through the ABGF significantly reduces this risk. As at the date of this article, the bill to establish the ABGF is before the senate. The Senate has requested a report from the Economics Legislation Committee on the terms of the bill. This report is expected to be delivered by 21 February. 

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Bianca Reynolds
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