The double blow for SMEs: Gottliebsen

Buried in the Reserve Bank summary of what is taking place in Australia is a nasty development and yesterday I saw it being played out. If that nasty development continues too long, the money markets may find that the Reserve Bank does not need to lift interest rates to the levels markets are forecasting for late in 2010 and 2011. The bite on the economy will occur at lower interest rate levels.

Reserve Bank Governor Glenn Stevens says that “for many business borrowers increases in risk margins are still coming through”. Behind that statement is a big difference between the big and small business experience. Large business borrowers have reduced their borrowings in the wake of a wave of big equity raisings which leaves small and medium businesses to meet the double whammy – higher official interest rates and higher bank margins.

Small business advisers tell me that the banks are doing exactly what Stevens says – lifting charges and fees. And most smaller businesses have no choice but to pay because they can’t raise equity. So what they do is hold back on paying suppliers for as long as possible which means that while many businesses are booking profits it is not matched by cash. Anyone supplying capital equipment to smaller enterprises is being hit hard.

Banks face a continual increase in borrowing charges because, as they roll over three and five year overseas borrowing, they are replacing low interest rate loans with much higher rate loans. Small businesses are copping the brunt of costs involved in this changeover, but if banks go too far in increasing