Output Group 1.3: Business Development and Assistance
IBA will assist Indigenous people to establish, acquire and grow viable businesses, thereby contributing to employment, wealth creation and participation in the economy. The program is aimed at those Indigenous people who are unable to access private sector finance. The success of the program is assessed on how effectively it assists Indigenous people to develop successful businesses. (FaHCSIA Portfolio Budget Statements 2008–09)
Overview
Small business is the engine-room of economic development in all developed economies. In recognition of the importance of Indigenous participation in small business, the Australian Government funds IBA’s Business Development and Assistance Program.
From a commercial lending perspective, IBA would be considered a high risk lender since this program assists Indigenous Australians not eligible for bank assistance to enter the small business arena. The 2006 Australian Census indicates that 5.5 per cent of employed Indigenous Australians are self-employed, compared with 16.4 per cent for the total Australian employed population. IBA aims to reduce this gap by providing business support and business loans to Indigenous Australians who can demonstrate that they have a sound business proposal and are able to satisfy IBA’s commercial criteria.
IBA offers clients the support they need before they commit themselves to a business. The Business Development and Assistance Program comprises three integrated products:
- business loans
- business support
- Economic Development Initiatives (EDIs).
IBA assists its clients to establish commercially viable businesses. Clients do not have to have a loan with IBA to access this support.
Business consultants, selected for their business acumen, work with IBA’s clients to conduct feasibility studies, plan the business and undertake business-related skills development. Skills acquired during the business life-cycle can include marketing strategy development, setting up a website and cash flow management.
In its provision of business loans, IBA primarily has regard to the commercial viability of the proposed business, the capacity of the proponents to operate the business, the degree of risk and the security offered.
IBA offers eligible applicants concessional interest rates, with terms structured to help them overcome any barriers that might prevent them from progressing into business. Business loans are assessed and settled in-house. When assessing specific industries where there is no in-house experience or knowledge, IBA seeks the advice of qualified consultants.
Economic Development Initiatives are designed to help Indigenous people inform themselves about economic opportunities before deciding whether they want to take the next step of starting up a business. EDIs include assessing and studying the local economy and identifying opportunities in selected regions. Presentations are designed to raise awareness and respond to individual aspirations to enter the small business market. EDIs are most frequently carried out in regional and remote areas. Participants often find that they are not able to make the level of commitment which comes with being in business. This important first step can often be the trigger to help people decide whether to proceed or take another path.
Under a partnership established between IBA and the National Australia Bank (NAB) in 2007–08, IBA provides clients with business support and NAB provides them with micro-finance loans of between $500 and $20,000. The loans are provided on an unsecured basis, for terms up to three years. This product allows Indigenous entrepreneurs to get involved with a private sector bank early in the life of their business while benefiting from IBA’s ongoing business support. (See also ‘Stakeholders’, page 98)
Performance
Rather than simply helping Indigenous Australians get into a business, IBA focuses on a business’s long-term viability and encourages potential borrowers to undertake a full due diligence process and to develop a comprehensive business plan. In-house planning is also required.
IBA met all Output Group 1.3 Portfolio Budget Statements targets for 2008–09, as outlined in Table 9.
| Key performance indicators | 2008–09 target | 2008–09 results |
|---|---|---|
| a This result is calculated by current loan number (312) divided by total of business support approvals and EDIs undertaken (704).
A statistical summary of all business development and support activities in 2008–09 and in 2006–07 is set out in Table 10. Detailed information on performance in relation to business loans, business support and Economic Development Initiatives is set out under those headings. |
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| Repayment rate on new loans | 95% | 98% |
| Reduction in value of loans in arrears | 5% | 7% |
| Survival rate for new businesses funded past the first year | 80% | 86% |
| Business outcomes from clients assisted through business support or Economic Development Initiatives | 20% | 44%a |
| Number of applications received, number of applications approved and value of applications approved | Report actual results | 106 loan applications received |
| 74 loan applications approved | ||
| $14.89 million (value of loan applications approved) | ||
| Activity | 2007–08 | 2008–09 |
|---|---|---|
| a Includes 439 applications carried forward from 2006–07.
b Excludes carry over from prior year. |
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| Value of loans approved ($ million) | 17.25 | 14.89 |
| Business support expenditure ($ million) | 5.75 | 7.79 |
| Economic Development Initiative expenditure ($ million) | 1.25 | 1.99 |
| Enquiries answered | 1,707 | 1,785 |
| Business support applications approved | 1,051a | 648b |
| Loans approved | 102 | 74 |
| Loans declined | 16 | 27 |
| Economic Development Initiatives supported | 46 | 56 |
| Jobs created or supported through loans settled | 244 | 252 |
| Indigenous jobs created or supported through loans settled | 206 | 168 |
Global financial crisis
The increased demand for business support and decreased demand in applications for business loans in 2008–09 reflected the challenging trading environment and weaker business outlook as a result of the global financial crisis. In the past, business support was split almost equally between new and existing businesses. However, in the past 12 months IBA’s business advisory services were more involved in assisting existing businesses through the weaker economic conditions than in writing new business. In planning for this financial year and looking at the trends emerging in the private sector, IBA’s strategy was to be more rigorous in its assessment of new proposals and to focus on how it could support existing businesses affected by the global financial crisis.
As expected, the rate of arrears on business loans grew in 2008–09. To provide the best possible support to Indigenous business-people experiencing difficulties with their businesses, IBA:
- placed significant emphasis on the provision of advisory services to clients whose businesses were experiencing difficulties
- introduced the Optimist financial analysis software, to assist staff to analyse clients’ financial statements and enable an early analysis of any potential cash flow or other issues
- strengthened lending and financial analysis training to staff, to improve their capacity to support clients and identify potential problems early
- strengthened loan management procedures
- exercised greater commercial rigour in the assessment of the viability of
new loan proposals.
The results of IBA’s efforts meant a peak of 124 high-risk ventures in February 2009, but the number of loan accounts in arrears by two or more repayments steadily reduced to 94 by the end of June 2009. For at least half of the accounts, improvements were attributable to early intervention and negotiation with clients in arrears. Given the economic downturn, IBA recognised that maintaining a reducing trend in arrears would be challenging. However, early identification of potential problem loans, tighter monitoring of loans and critical assessment of loan failures should contribute to improved outcomes in 2009–10. This will be an area of emphasis in the new financial year.
IBA’s analysis and a number of academic studies on business failures and their causes suggest that the two main reasons for business and loan failures are inadequate planning and poor business and cash flow management by clients. IBA is developing a number of improved arrangements to address loan failures in its plans for ongoing improvements to business support services and loan management practices in 2009–10.
Business loans
Business lending activity decreased in 2008–09, with 106 loan applications assessed and 74 loans approved. Thirty eight loan applications were also diverted to mainstream lenders:
- 63 loans, totalling $10.61 million, were approved and proceeded to settlement (this included loans to five existing IBA clients)
- 9 loans, totalling $3.78 million, were approved but did not proceed because the clients withdrew their applications
- 2 loans, totalling $0.5 million were approved, but subsequently revoked by IBA
- 27 loans, totalling $7.07 million, were declined
- 2 loan applications were withdrawn before the assessment process was completed
- 3 loans were being assessed at the end of the reporting period.
Details of IBA’s total active business loans are set out in Table 11.
| Regional office | 30 June 2008 | 30 June 2009 |
|---|---|---|
| a In 2008–09, a number of loans were migrated from the Cairns office to the Mount Isa office.
b Tasmania is resourced by the Melbourne office. c The Port Hedland area is resourced by the Perth office. Note: Thirty loans were discharged during the reporting period and 35 were written off. |
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| Adelaide, SA | 23 | 24 |
| Alice Springs, NT | 8 | 11 |
| Brisbane, Qld | 43 | 42 |
| Broome, WA | 24 | 20 |
| Cairns, Qlda | 37 | 33 |
| Darwin, NT | 31 | 30 |
| Grafton, NSW | 32 | 31 |
| Kununurra, WA | 6 | 6 |
| Melbourne, Vic | 24 | 25 |
| Tasmaniab | 10 | 8 |
| Mount Isa, Qlda | – | 9 |
| Perth, WA | 25 | 19 |
| Port Hedlandc | – | 8 |
| Sydney, NSW | 35 | 30 |
| Wagga Wagga, NSW | 16 | 16 |
| Total | 314 | 312 |
Figure 18 shows the number of loans by industry sector; most loans were made in the agriculture, fisheries and forestry sector, closely followed by the retail and construction sectors.
Figure 18: Number of active business loans (total 312), by industry sector, 30 June 2009
Loan arrears and risk management: In 2008–09, IBA’s specialist business loan management unit continued to build on initiatives commenced in the previous year to improve loan management practices. Initiatives included:
- managing loans where insolvency or administration were the only options and addressing the legal and contractual obligations of clients whose businesses had failed
- in some cases, significantly redeveloping loan management procedures with a focus on risk management, including tightened monitoring and arrears management
- developing and introducing a risk grading system for all loan accounts within the portfolio to assist in identifying the probability of default and any remedial support that might be required
- broadening portfolio data analysis to assist in identifying factors underlying loan failure.
There has been a consistent improvement in the survival rates of loans settled:
- 65 per cent of loans settled in 2005–06 survived to 30 June 2009
- 76 per cent of loans settled in 2006–07 survived to 30 June 2009
- 86 per cent of loans settled in 2007–08 survived to 30 June 2009.
By way of comparison, the Australian Bureau of Statistics reports that mainstream businesses have a survival rate of 75 per cent for year one, and 58 per cent for year two. IBA recognises the importance of working with clients who experience difficulty in meeting loan repayments, as that often indicates that their businesses are under stress. IBA then works with borrowers to identify any remedial action that might be taken.
In 2008–09, there was an increase in loan arrears compared with 2007–08 (Table 12), consistent with the downturn in the economy. IBA discussed support arrangements with borrowers in arrears, which in some cases led to an improvement; in others, it resulted in closure of the business.
| 2007–08 | 2008–09 | |
|---|---|---|
| Arrears as a proportion of the total portfolio (%) | 5.8 | 6.4 |
| Loans under arrears management (number) | 57 | 94 |
Note: Includes loans that are two or more payments in arrears.
Employment outcomes
During 2008–09, IBA business loans assisted clients to create or support a further 252 jobs in Indigenous-owned businesses. Indigenous Australians held 168 of these jobs. A total of 810 jobs have been created or supported through the provision of business loans over the past three years (Figure 19).
It is clear that IBA’s business loans and associated business generate self-employment and the employment of other staff, thus increasing Indigenous labour force and business participation.
Applicants often seek to enter business to provide a living for themselves and their families and there are often spin-offs by way of additional jobs, which might include Indigenous Australians. The small business operator can choose their employees and the skills they bring into their business. Often Indigenous business owners employ other Indigenous staff as their business grows and their financial circumstances allow for additional staff. Results for the past three years, however, indicate a decrease in Indigenous employment outcomes. Some of this can be attributed to the fall in loans written. However, more relevant is a trend to involve a mainstream partner in the business to provide either capital or business expertise to strengthen the business overall.
Figure 19: Jobs created or supported through IBA business loans, 2006–07 to 2008–09
Business support
Business support tailored to the individual needs of clients is an integral part of IBA’s small business products. Business support is available to assist Indigenous Australians to establish small businesses and to operate them successfully. Business support is delivered through a panel of business consultants, in a manner that helps clients to achieve self-reliance.
Statistics: In 2008–09, 1,219 business support projects were undertaken: 648 new business support projects and 571 business support projects carried forward from 2007–08. In 2007–08, 1,051 business support projects were undertaken, of which 439 were projects carried forward from 2006–07.
A breakdown of business support by location is provided at Table 13.
| Regional office | Pre–start up support (no. of recipients) |
Post–start up support (no. of recipients) |
|---|---|---|
| a Tasmania is resourced by the Melbourne office.
b The Port Hedland area is resourced by the Perth office. |
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| Adelaide | 16 | 15 |
| Alice Springs | 21 | 17 |
| Brisbane | 32 | 47 |
| Broome | 17 | 28 |
| Cairns | 50 | 54 |
| Darwin | 94 | 34 |
| Grafton | 17 | 28 |
| Kununurra | 9 | 7 |
| Melbourne | 21 | 16 |
| Tasmaniaa | 4 | 6 |
| Mt Isa | 7 | 6 |
| Perth | 16 | 18 |
| Port Hedlandb | 1 | 5 |
| Sydney | 17 | 22 |
| Wagga Wagga | 13 | 10 |
| Total | 335 | 313 |
Pre–start up support is provided to clients who have not yet commenced in business. Typically this includes assistance with the preparation of feasibility studies and strategic marketing plans, and the provision of business-related training. Post–start up support is provided to clients that have already started in business. Typically this includes mentoring and business-related training and assistance to analyse and resolve difficulties clients may be experiencing with their business. The business-related training given in each period focuses on different aspects.
The regions with higher levels of business support tend to correlate with areas of higher Indigenous population.
Enquiries: The number of enquiries about IBA’s small business development products has grown steadily, from 1,653 in 2006–07 to 1,785 in 2008–09 (Figure 20). This demonstrates that Indigenous Australians continue to be interested in participating in the small business sector.
Figure 20: Trend in enquiries received, 2006–07 to 2008–09
Economic Development Initiatives
Economic Development Initiatives (EDIs) aim to support Indigenous economic and business development through funding projects which facilitate the development of business-related skills, knowledge, research of economic opportunities and support to overcome barriers and access relevant information and assistance.
EDIs differ from business support in that they support multiple beneficiaries or overcome an identified skills gap, whereas business support is delivered to one identified client or business. With a skills gap, for example, clients who are assessed as not being business ready can be referred to skill development workshops to improve their business skills. As their skills improve, they go on to access one-on-one business support.
In 2008–09, IBA approved, commenced or completed 56 EDI projects Australia-wide (10 more than in 2007–08), involving some 700 Indigenous participants. As shown in Figure 21, there was an increase in expenditure in line with the increased number of projects.
Figure 21: Trend in EDIs, 2006–07 to 2008–09
Table 14 outlines EDI projects by type and provides an overview of the outcomes for each. The projects highlight how EDIs can be designed and delivered to help overcome Indigenous disadvantage by providing information to help Indigenous Australians decide whether they should develop their business concept.
| EDI type | Projects | Outcomes |
|---|---|---|
| Stimulating regional activity | Murray–Riverina district, Victoria; Innisfail to Ingham and Charters Towers to Richmond, Queensland | These projects delivered services in areas that did not have a local IBA presence. During the year the projects delivered services to 92 participants, nine of whom have gone on to access IBA business support. |
| Young entrepreneurs | Cairns Indigenous Entrepreneurs Comic | A comic is being developed to motivate and educate young Indigenous people to consider small business ownership. |
| Industry-specific projects | Port Hedland mining tenders, northern South Australia remote motor vehicle sales and services and Kimberley oil and gas networks |
These projects were designed in response to an identified need. They investigated the feasibility of particular industries or enabled Indigenous business-people to engage with a particular industry that had been identified as having a potential for Indigenous business outcomes in a specified region. For example, the Kimberley oil and gas project resulted in 23 prospective businesses identifying 15 market-ready ideas and a further three that require additional work. |
| Business training | Indigenous tourism training | 12 Northern Territory tourism operators were provided with practical guidance on how to improve, develop and implement their business ideas. |
| Business tools | Indigenous tourism e-commerce and website development | 40 Indigenous tourism businesses were assisted with the development of their business capacity and marketing through website and e-commerce portals. |
| Capacity building for Indigenous business | A legal document and training tool was developed to assist clients into joint ventures, partnerships or companies. | |
| Intensive regional capability project | Galiwin’ku – Stage 3 | This project is a successful model for small business development in remote communities. Over the past three years 30 clients have accessed support and 24 have gone on to establish small and micro businesses. |
| Regional scoping | South West WA, Naaguja Native Title claimants, Midwest WA, Borroloola, Kununurra, Warmun and Cape York | These projects aim to identify opportunities for business development and capacity within a region. The outcomes are often long term. In 2008–09, seven projects had input from 115 participants, resulting in 37 business support applications and one business being established. |
| Sponsorship | Queensland Business Reconciliation Forum, Western Australian Indigenous Tourism Operators Committee and Selling Yarns 2, Canberra | 44 Indigenous business-people were successful in gaining sponsorship to attend relevant business events or conferences where there was a direct outcome for their business. |
| Strategic development |
Ngarrindjeri Regional Authority, Leedal Pty Ltd in Fitzroy Crossing and Dhugamin in Brisbane | These projects aim to assist Indigenous community businesses to develop their business capacity by forming and strengthening economic entities so that they can successfully establish and manage viable businesses. |
| Skill development workshops | Workshops designed to introduce a group of aspiring Indigenous entrepreneurs to basic business skills in a group setting | 354 participants attended 27 workshops around Australia. |
Assistance for non-remote CDEPs
IBA offered assistance to non-remote Community Development Employment Project (CDEP) providers that had been advised that their CDEP contracts would end on 30 June 2009. The assistance was offered in conjunction with the alternative assistance offered by FaHCSIA and Department of Education, Employment and Workplace Relations. IBA provided seven of the 40 organisations whose CDEP contracts would end with tailored business support. A further five organisations were finalising their applications at the end of the financial year in preparation for 2009–10.
Cape York Welfare Reform
The Cape York Welfare Reform trial is being conducted in the Indigenous communities of Aurukun, Coen, Hope Vale and Mossman Gorge.
IBA is committed to supporting Indigenous Australians in the four communities of the Cape York Welfare Reform trial to own successful small businesses and achieve wealth creation. In 2008–09, IBA provided business support and mentoring to seven clients in those communities at a cost of $0.13 million (2007–08: eight clients at a cost of $0.131 million). Four of the eight clients IBA supported in 2007–08 subsequently applied for business loans and started their own businesses. IBA provided loans to three of the four clients and assisted the other to obtain business finance from a bank.
Outlook
The 2009–10 FaHCSIA Portfolio Budget Statements targets shown in Table 15 will guide IBA’s performance in the next financial year.
| Key performance indicators | 2009–10 target |
|---|---|
| Survival rate for new businesses funded past the first year | 60% |
| Percentage of clients who have started and remained in business who have been assisted through business support or Economic Development Initiatives | 20% |
In 2008–09, IBA focused on streamlining and refining its lending product; in 2009–10, it will focus on improving the quality of its business support product to deliver more effective assistance to clients.
IBA will continue to develop the skills of its staff, its business systems and processes to improve service and outcomes for clients.
The economic climate will be an important factor in relation to the number of new loan applications. IBA’s overall strategy for improving the levels of Indigenous participation will be to offer appropriate support and early commercial intelligence for planning after a rigorous commercial assessment of the sustainability of business proposals.
IBA is committed to improving its support and lending arrangements to increase the extent of participation in small business regardless of where people live.