Picture of people with vertical bars as shadow

Conducting a $230 million capital-raising during a pandemic could well be seen as a disaster in the making for most start-up entrepreneurs, and as too great a risk. But not for SME-focused Judo Bank, launched last year by co-founder Joseph Healy.

He and the board saw the COVID-19 crisis as an opportunity. “As with everything that we've done with Judo, we've taken a medium to long term view, rather than getting fixated on the short term,” Healy said during an interview with the AICD.

“Clearly with the onslaught of COVID, there were some directors that said maybe we should postpone things…but we have very strong support from our investors and a board that sees the opportunity in both in stepping up and being available for SME businesses in the eye of the COVID storm. But also that COVID will go. And that it will be a different world that we will operate in post-COVID.”

Judo now has a $2 billion lending book to the SME community in Australia, with another $1 billion in the pipeline, says Healy, a former head of business banking at National Australia Bank. So it is constantly assessing where opportunities for SMEs lie going forward.

“I see across the landscape lots of examples of businesses that have reinvented themselves in a way that showed great agility and adapted to this environment, and will come out of COVID significantly stronger as a result,” he says.

As an example, one restaurant in Melbourne that is a Judo client and previously held a traditional approach to dining-in, had been forced to change its business model as a result of the crisis and is now making $60,000 a week from home delivered food.

He sees opportunities in the digital delivery of services such as education, health and fitness, nutrition, telehealth, and restaurant and grocery home delivery. “I think generally that wherever services are required, be it dining, be it fitness, be it other service-based industries, I see that those businesses will find new channels of revenues and new customers.”

Online retail ordering has also “gone through the roof”. “I think the move to online purchasing was already very much in place pre-COVID but it has really accelerated.

There was a certain segment of the community that was kind of reluctant or not as confident in using online purchasing, but is now doing that quite naturally,” says Healy.

Education is another example of rethinking taking place. “People felt traditionally that education had to be a face-to-face experience, but because of COVID, people have been forced to look at online delivery of lectures and online tutorials. And I see that as an industry that's going to grow and grow and also make the whole education opportunity much more accessible to people.”

Warning on mounting debt

The problem for many SMEs is mounting debt and he advises extreme caution. Judo has compiled analysis which estimates that by the end of September this year, there will be an increase in liabilities due to SMEs to about $25 billion, which will increase to about $40 billion by the end of March 2021.

This includes new loans, deferred interest payments, deferred rent and tax and other payments.

In order to combat this problem, Healy has lobbied the federal government and Treasury for a small business rescue package to be offered by the government and private enterprise. Talks are “ongoing”, says Healy. This plan would temporarily convert some of the debt into equity for businesses with a viable future. The business could later buy back the equity stake upon meeting financial targets, or replace it with debt when they recover financially.

The important element is to strike a balance between caution and risk, says Healy. “I think it's time to be cautious. I know that some SMEs will borrow just to stay alive and I understand that. They need to rein in costs and try to keep the business alive, because you don't want to close the business down. And JobKeeper helps enormously,” he says.

“The key right now in my mind is to be cautious, but also to use this as an opportunity. We've said this to all of our SME customers – use this as an opportunity to think about the future. In the hustle and bustle of daily life, you find yourself on the crowded dance floor trying to just get by. What COVID has done is create an opportunity to get off the dance floor and out onto the balcony, to think strategically about the future.”

Healy has four pieces of advice for SMEs battling the crisis:

  1. Discover your customers’ unmet needs
  2. Evaluate the risks and costs
  3. Test new products/services with customers
  4. Invest in innovation

Launching a global business during the pandemic

One SME which launched in mid-2019 and has prospered during the crisis by reading the changing market correctly is Lyre’s Non-Alcoholic Spirits, a sophisticated drinks brand that has forged a successful global footprint in unlikely circumstances.

Three factors worked in their favour – partnering with Amazon, switching to an e-commerce focus and focusing the new brand on a wellness trend which capitalises on healthy living and a consumer preference surge towards non-alcoholic beverages.

Lyre’s co-founders Carl Hartmann and Mark Livings took part in the Amazon Australia Launchpad program, which gives Australian startups access to the platform’s retail expertise and infrastructure so they can grow their businesses. The program is designed to help Australian startups and entrepreneurs bring innovative and unique products to local customers.

“Signing up to the program gave us access to Amazon’s online retail expertise, infrastructure and consumers so we could grow our business at pace,” Livings told the AICD in an interview.

When launching your own e-commerce channel, a considerable investment of time and money goes into attracting customers to your brand, he adds. “So, for a new brand like ours, it's just so much easier if you can take your products to a marketplace where customers are.”

The sudden closure of bars and restaurants following lockdown restrictions worldwide greatly impacted the business, says Livings. “Fortunately, having launched with a strong focus on e-commerce, we were able to quickly divert our resources to grow via e-commerce to maximise growth through this period.”

The crisis also delivered new potential customers seeking healthier lifestyle choices. Digital marketing campaigns showing customers on video and via Zoom masterclasses how to make cocktails using recipes have been popular and translated into sales.

“More than ever, all the signs across the world indicate people are looking for better options and getting back to a less intense life. We play a role within that consumer shift as we don’t come from the angle that “thou shalt not drink”, but rather that you should have a high quality, credible alternative to alcohol.

“We have people who are sober curious, looking for a way to change the way they drink and then we have people who are not even aware that non-alcoholic spirits and Lyre’s even exists. I believe all SMEs should think about what role their product plays in this new emerging world, as I have heard said often through this period “the future isn’t what it was going to be”.”

The global company has transactional sites in Australia, New Zealand, the US and UK, with sites in Europe and Asia on the way.

SMEs are innovating

Lyre’s is one of many Australian businesses that have pursued innovation during the crisis, according to the Amazon Launchpad Innovation Report, released in July this year.

The research shows 28 per cent of SMEs innovated for the future during lockdown, while 35 per cent refreshed their business plans. The survey of Australian business owners reveals 92 per cent of SME businesses feel optimistic for the future, despite the challenges they face. Around 38 per cent reported a heightened focus on creativity during the shutdown, with a quarter of SMEs also exploring new revenue streams or launching an online channel during this time.

During COVID, products were also revamped, with one in six SMEs innovating by creating new products or transforming their existing ones. Meanwhile, one in five planned for or built a new business or product strategy moving forward, the Amazon research says.

The e-commerce giant, which launched in Australia in 2017, is now offering 125 million products across 30 different categories. Amazon Australia partners with local SMEs through the Amazon Launchpad Innovation Grants program.

New Australian Business Growth Fund

In terms of federal government assistance for SMEs, a $520 million growth fund to provide patient equity capital for small and medium enterprises has been announced. The Australian Business Growth Fund will be launched in 2020 and be funded by $100 million from the federal government and from each of the “big four” local banks, as well as by $20 million from HSBC.

Established Australian businesses will be eligible for long-term equity capital investments of between $5 million and $15 million, where they have generated annual revenue between $2 million and $100 million and can demonstrate three years of revenue growth and profitability.

The fund’s investment stake will be between 10 and 40 per cent, allowing small-business owners to maintain control. The funding will be provided over a five-year period.

Other government funding schemes

The federal government is supporting up to $40 billion of lending to SMEs through the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme. The government is guaranteeing 50 per cent of new loans issued by eligible lenders to SMEs.

The federal government has also funded innovation projects this year through its Accelerating Commercialisation grants program. The 21 projects sharing more than $10 million in funding include GenomiQa, which will commercialise its diagnostic platform to support oncologists to manage patient care, and Codestream Solutions, which will commercialise its FloodMapp technology in Australia.

In another round of funding totaling $3.7 million in July this year, environmentally-focused firms received funding via the government’s Entrepreneurs Programme.

These include Queensland’s AMS International Technologies, which has developed energy management products, and NSW’s Ubaryon, which will commercialise its metal separation technology to improve safety, economic, and environmental outcomes.

In addition, a Western Australian business, Environmental Water Solutions, will commercialise a unique chemical filtration system that is the first to be developed in the world, to protect drinkers from contaminated water. Flex-G, located in the ACT, has manufactured a high-performance coolant for motorsports and electric vehicles. And Victoria’s Spark Breweries and Distilleries has prototyped a new compact brewing machine which will allow for greater returns for pubs, hotels and craft brewers.

Meanwhile, under the $45 million BioMedTech Horizonsv (BMTH) program, 21 projects will receive funding to help unlock key health challenges. Successful applicants will use the funding to develop medical devices – including wearable devices, telehealth and telemedicine, and digitally-enabled personalised medicine.

Victorian-based Seer will receive $1 million to develop a real-time seizure forecasting system, through mobile and wearable monitoring, to empower people with epilepsy to regain control of their condition. Other projects include a 3D bioprinting system for regenerating skin and developing a smart brain biopsy needle for faster, safer neurosurgery.

Other federal government grant programs include:

  • Export Market Development Grant
  • Research and Development Tax Incentive
  • Certain Inputs to Manufacture
  • Australian Apprenticeships Incentives Program (AAIP)
  • Business Development and Assistance Program
  • Venture Capital Limited Partnerships