Small businesses in ‘survival’ mode as access to finance remains a pain point

Small and medium businesses are bearing the brunt of ongoing lockdowns and many are now in “wait, survive and see” mode, says Reserve Bank governor Philip Lowe, as new research suggests a third of small businesses are considering walking away from their business altogether. 

In a speech to the Anika Foundation on Tuesday that covered the impact of the Delta coronavirus strain on the economy, Lowe said while government assistance is helping to a certain extent, SMEs continue to face “very difficult conditions”. 

This is in contrast to many larger firms, which Lowe described as having balance sheets “in good shape” and are planning to expand their operations once restrictions are lifted. 

These businesses have a “strong incentive” to keep staff on, even during lockdowns, to avoid having to re-hire staff in a tight labour market, said Lowe, who also suggested that business investment will also likely pick up again once restrictions and uncertainty eases. 

However, for some SMEs, the RBA governor said “there is a limit to how long they can wait” and so the sooner the restrictions are lifted, the better. 

“The longer they have to wait before reopening, the more difficult things will become and the greater the potential damage to this important part of the economy,” he said. 

30% consider “quitting”

The urgency of the situation faced by many small businesses was also reflected in the results of a survey from Judo Bank, published on Tuesday, which found 30% of small businesses with between $1 million and $10 million in annual turnover are considering “quitting altogether”.

Judo Bank CEO Joseph Healy said this finding “underscore[s] the ‘boom or bust’ impact of COVID on pockets of this critical sector of the Australian economy”.

Overall, the survey of 1750 SMEs, commissioned by Judo Bank and conducted by East & Partners, found 46% of SMEs are in a growth phase; however, this was more likely to be the case for bigger businesses with up to $50 million in turnover. 

The survey found SME growth continues to be constrained by a lack of access to finance, with a significant “funding gap” meaning these businesses are unable to secure the funds needed to grow.

Despite recent changes to the federal government’s SME loan guarantee scheme designed to promote more lending to SMEs and moves by the big banks into invoice financing, small businesses continue to encounter difficulties in obtaining bank loans.

This has led to an increasing number of challenger banks like Judo and other fintechs entering the SME finance space, including digital-first Avenue Bank, which was recently granted approval by the prudential regulator to offer short-term finance to small businesses. 

The Judo Bank survey found that while close to half of SMEs (48.1%) had applied for funding in the past six months, more than one in four businesses (27.7%) were turned away.  

For businesses that have been able to secure finance, the survey found they directed the funds towards investment, employment and growth, and, therefore, a lack of funding has direct implications for employment. 

“The report shows that those SMEs that were refused a loan were in effect, stopped from employing on average three additional full-time staff members — and this has direct implications on employment and economic recovery post pandemic,” said Judo Bank chief relationship officer Angelo Manos.

There is also a gap in terms of business expectations for how quickly loans should be approved by banks, and the reality. 

Businesses surveyed said they expected loan applications to be approved or rejected in around 11 days, but it is taking an average of 23 days for banks to deliver that news. Similarly, SMEs said they expect settlements and discharging of loans to happen within five days, but Judo says the average is currently at 20 days and 42 days, respectively. 

The delays in discharging loans, which Judo has previously raised with the competition regulator, are “adding insult to injury”, said Manos. 

“These unnecessary loan transfer delays by the major banks inhibit fast access to funding at a time when small businesses need it most,” he added. 

While economic growth is expected to contract again in the September quarter after slowing to 0.7% last quarter, Lowe maintained in his speech that the Delta outbreak has “delayed” but not “derailed” Australia’s economic recovery.  

“The outbreak is a significant setback for the economy and it has introduced an additional element of uncertainty about the future,” he said. 

“But there is a clear path out of the current difficulties and it is likely that we will return to a stronger economy next year.”