Recent years have witnessed a surge in the value of loans extended to small and medium businesses, which initially seemed like positive news.
However, new data has unveiled a concerning reality—there is a significant number of SMEs left without any financial lifeline. The latest findings from the Australian Bureau for Statistics (ABS) and the ABA highlight a decline in the value of small business loans from $4.81 billion in June 2021 to $4.79 billion in June 2022.
While Australian banks attribute this decrease to low demand from SMEs, recent data paints a different and more worrisome picture. Shockingly, a staggering 50 per cent of SMEs report facing daunting obstacles when attempting to secure business loans from banks.
These revelations stem from a survey conducted by an independent panel of respondents commissioned by Small Business Loans Australia, a business loan comparison site. The survey encompassed 210 business owners or senior decision-makers spanning the entire SME spectrum, including micro (1-10 employees), small (11-50 employees), medium-sized (51-200 employees), and a small percentage of larger businesses (over 200 employees).
The survey highlights that a significant portion of SMEs have financing plans for this year, with more of them opting for secured financing (75 per cent) over unsecured options (50 per cent).
However, despite 40 per cent of SMEs seeking funding from banks last year, half of them encountered obstacles during the process. These obstacles included excessive timeframes for loan approval (19 per cent), difficulty obtaining favourable interest rates (17 per cent), and the inability to provide required property or personal assets as security (15 per cent).
Since 2020, businesses have faced considerable constraints in accessing credit, with banks attributing this challenge to the application of stringent lending standards, especially for SMEs. Seventeen per cent of survey respondents reported that these standards created additional difficulties for their loan applications.
Moreover, Australian small businesses have long lacked confidence in their ability to access finance. A research report commissioned by the Australian Government titled “Small business access to finance: The evolving lending market” revealed a persistent negative perception among SMEs regarding their access to finance. This perception has remained consistently low since the financial crisis, even before the COVID outbreak. The concerns expressed by SMEs hold merit as small businesses carry relatively higher risks and are approximately three times more likely to default on a loan compared to their larger counterparts. However, loan approval figures show that around 75 per cent of all small business loans are approved in Australia.
In the prevailing economic conditions, numerous SMEs will find themselves reliant on business lending as their cash flow diminishes. Small Business Loans Australia’s findings indicate that the most pressing concern among SME directors is the rapid increase in inflation, which correlates with rising interest rates and reduced consumer spending. Approximately 11 per cent of respondents expressed concerns about their existing loan obligations, while a significant 76 per cent believed that surging interest rates and inflation would impact their cash flow. Among the anticipated challenges, 30 per cent expected difficulties in collecting customer payments, 26 per cent foresaw struggles in attracting sales, and 20 per cent believed that both factors would affect their cash flow.
The survey also revealed that micro-businesses, those with 10 or fewer employees, were the least likely to consider applying for a business loan as a solution to their cash flow issues, with only 32 per cent expressing such intent. In contrast, 66 per cent of larger SMEs (51-200 employees) and 75 per cent of small SMEs (11-50 employees) would consider seeking finance to address cash flow challenges.
Alon Rajic, the Founder and Managing Director of Small Business Loans Australia, emphasizes the need for action from the Australian government. He suggests reviewing lending criteria or mandating maximum approval timelines to address these factors and actively working towards enhancing the accessibility of SME finance within responsible lending practices. Rajic points out that amidst economic uncertainty, traditional lending standards are being enforced even more strictly, exacerbating the situation.
The full survey results, including breakdowns across business sizes, can be found here: https://smallbusinessloansaustralia.com/is-australia-doing-enough-to-improve-access-to-capital/
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