SMEs warned that lending rates will only increase

Small and medium business owners hoping that further cuts to official interest rates will translate into lower rates for business borrowers have been handed a blunt warning by a new report into the SME banking sector.

The report, by Fujitsu Consulting and JP Morgan, shows that while official interest rates have fallen by 4.25% to 3% in the last six months, 44% of SMEs are paying between 6-8% and a staggering 36% are paying over 8%.

And Fujitsu Consulting executive industry director Martin North says things are unlikely to get better.

“The sorts of rates that are currently accessible are as good as it’s going to get,” he says.

He says banks are in the middle of a wave of bad debts from SMEs who are suffering from cashflow problems. Indeed, the SMEs surveyed for the report nominated maintaining adequate working capital as their number one reason for borrowing.

North says the banks are justifiably worried the SME bad debt wave will then spill into the household sector, as three million households rely on a small business for their financial security. This will create another wave of bad debts which will force the banks to increase risk ratings on small business customers even further.

“Two years ago banks had underpriced risk generally and there’s been a big adjustment, particularly in the small business sector, because of their reliance on cash,” North says.

“It’s about cashflow. It’s about survival. This isn’t about growth anymore.”

North also predicts lending rates will have to increase in the medium term because of the heavy borrowing of governments around the world which are trying desperately to stimulate their economies.

The report found confidence amongst SMEs had fallen most markedly in Queensland and Western Australia, where the sudden end to the mining boom has put pressure on entrepreneurs.

North says most SME owners are bracing for a difficult 12 months ahead, but says his interviews with entrepreneurs gave him confidence that business owners are committed to getting through this period.

“There’s huge heart in the small business sector. Entrepreneurs haven’t given up – they believe in the long term success of their business.”

Given how many households are relying on the SMEs, that’s good news for the economy.