As soloists, we’ve all heard it before. We’re sitting around at a social event and the topic turns to work. “I couldn’t do what you do.” Or, “How do you cope without the steady pay cheque?” Maybe, “I wish I could wear pyjamas to work!” Sigh.
Then our other friend who’s been gritting their teeth pipes up. The “closet solo.” The one who starts describing their own business idea after only a whisper of prodding. They set their drink on a nearby table (coaster be damned) and they’re off. They’re off mapping out the intricacies of what they’d do, how they’d do it, and how it would help people. Their arms fly like a mad conductor as their vision materialises in their mind’s eye. They might even take to their feet, possessed of the spirit of Steve Jobs introducing the iPhone. Then reality sets in. Sinking into their chair and grabbing their drink, they mutter, “I doubt I’d ever get it off the ground.”
According to a report by the Australian Banking Association, nine million Australians have the same desire.
60% of those cited “access to money” as the reason they don’t take their first giant leap into business-kind. That’s five point four million people. Again, with an M.
This breaks down into 55% of men and 65% of women. Two-thirds of those who pine for the soloist life are in the 18-34 age bracket; which is prime “solo time” to shine.
This perception is pervasive, but the fact is, there’s more support out there than you think. Despite a 33% drop in applications for loans, business loan approvals hover around 94%.
So why the reluctance? What’s really stopping us?
Soloists are the biggest cohort of business in Australia
Diving deeper into the data, 98% of businesses in Australia employ fewer than 20 people; 62% of businesses overall are in fact soloists.
With thanks to data from Savvy Finance, their anonymised data from 2019 (year to date) is 35% of business loan applications went towards unsecured business loans and cash-flow funding. 20% of applications went towards replacing equipment.
So why aren’t lenders and banks shouting this out from the high heavens? It could be due to their reputation hit during the Royal Commission. Or they don’t want to throw light on the fact the lending rules are now tipped in small business’ favour.
How to take advantage of the new Banking Code
The ABA outlines that the new Banking Code of Practice which came into play in July 2019 makes it easier for small business to secure funding.
Loan contracts are now simplified, are obligated to provide longer notice periods for loan condition changes and must improve communication and transparency when using valuers and insolvency practitioners.
Savvy Founder and CEO and small business lending expert Bill Tsouvalas says lenders tend to see start-ups favourably when they’ve been in business at least six months with consistent turnover.
“Business lending is a business based on risk,” Bill says. “As a broker, we advocate on behalf of the business owner to show our lending panel that their business needs a leg up to grow their business or maintain cash flow.
“Even if you run a ‘laptop’ business that didn’t require much start-up capital to begin with, taking it to the next level with a business loan doesn’t require endless proof of where your money is going to go.
“To be fair, the barrier to entry isn’t as high as it used to be, before the Royal Commission and this Banking Code came in. Ultimately, it’s a case of how much belief you have in your business.”
Anna Bligh, chief executive of the ABA said the same thing to News.com.au when discussing new “Plain English” contracts for small business loans: “[contracts] will have less conditions and it will have less circumstances in which the bank can call in the loan…so it will be a significantly fairer contracts where the balance of power tilts more towards the business than the bank.”
Putting the FUN into Financial Fundamentals
Chinmay Ananda, founder of the Finance Academy, speaker, consultant, and author of The FUNdamentals of Financial Statements (which every business owner should read, period) has worked with hundreds of would-be business owners guiding them through finance and financial statements. He says they tend to focus on the worst-case scenario instead of potential success and expansion.
“When people say ‘I want to start a business’, they are still not very confident if their idea will work. They are just testing it out. Once the business is open for least two to three years and generating revenue, they might need funding.
“Because many times once a business owner realises, yes, I need to borrow money to scale up my business because either I have got a new project or a new client and I have to increase my production capacity, or we need to invest in better technology. The next question is ‘how much should I borrow?’ “Less or more? It’s like asking ‘should I have high or low blood sugar?’ You need to strike a balance.”
Cash flow: business people’s greatest frenemy
According to ASIC, 47% businesses fail due to inadequate cash flow. A loan isn’t a panacea for fixing cash flow problems – it’s what you do with the money that counts.
“When business owners say they need a loan, I ask, ‘Where will this money be used?’ Some run into trouble, spending lavishly on office furniture and interiors. Sometimes they buy too much inventory. Money is all sitting in form of goods. Now in the [ABA Report] one of the reason people borrow or approach a bank for a loan is simply because of cash flow issues.”
Cash flow issues most often arise when long-term liabilities such as loans are spent on short-term assets and vice-versa. For example, putting an expensive new computer on a credit card (which 40% of soloists apply for according to the ABA stats) will end up causing problems down the line.
It would seem the head-rush of getting a business off the ground comes second to figuring out how to set our finances in order.
Are we teaching ourselves properly?
Bill says these issues may arise due to a lack of financial education that should really begin in primary school. “According to the Household, Income and Labour Dynamics in Australia Survey that came out this year , only half of the men and 35 percent of women surveyed could answer all the basic financial questions. We all live in an economy but lack the proper understanding of how it all works, which is a worry. It’s not helped by a culture where money matters aren’t discussed openly.”
Chinmay agrees, saying that business owners are looking to their accountants for advice when they should be following sound financial principles instead.
“Unfortunately, most of the time, people who are excited about starting something new, they fail to understand the difference between finance and accounting. They are all dependent on their accountants. Accountants can’t tell you what to do with your money any more than a football umpire can kick goals for your team.
“A business can apply for council grants – sometimes up to $40,000. The council doesn’t ask how they’ll return on that investment. They give the grant to a business that has a good idea that ticks all their boxes. The business owner gets all this money be it from a grant, investor, or bank, and it doesn’t come with a user manual.
“They end up doing what they did before and that’s when they get into trouble.”
If you’re one of the nine million living in quiet desperation – stop! The rules are in place to help you turn your great idea into a successful reality. Like all things in life, it’s not about how big your loan is; it’s what you do with it that counts.