Strong credit card usage by SMEs helps push national bill to $50 billion

Strong credit card usage by small- and medium-sized enterprises helped push Australian credit card debt to a record $50 billion in November, experts say.

East & Partners principal analyst Paul Dowling says business likely comprised about $14 billion – or almost 30% – of the total spending, with SMEs turning to credit cards amid difficulties accessing traditional debt funding over the past few years.

Dowling says SME usage of credit cards is “historically quite high” and has grown since the global financial crisis.

“Over the last three years, they’ve found it incredibly difficult to access debt funding.”

“We see a lot of cashflow-based credit card usage by small business. And although interest rates being charged are pretty horrendous, they seem to use credit cards almost as a default way of accessing short-term credit.”

The Reserve Bank figures do not break down the figure according to sector. This is difficult to do as credit card use by SMEs is often done through credit cards in the name of the business owner, making it difficult to distinguish from other spending.

But Sue Prestney of MGI Melbourne says she has seen a definite increase in the use of credit cards by businesses.

She says that as long as businesses factored in the higher interest payments, the liquidity they offered could provide benefits for SMEs.

For example, many businesses used them to qualify for early payment discounts, or to build reward points for travel.

“However there are inbuilt costs for the use of the credit card that you need to take into account,” she says.

“You have to build credit card cost into your budget – you can’t ignore it. It’s an erosion of profit margins that you have to factor for.”

Fifteen million cards were on issue, up from 14.7 million a year earlier, with the average debt per credit card being $3,333, the RBA said.

This is an increase of 1% over the past year. However, balances accruing interest have risen only 0.8% over the same period.

In the past five years, Australia’s credit card debt has grown by more than 30%. Although the latest number continues the upward trend, the figure shows the rate of credit card debt growth has slowed to a crawl.

Australia’s savings rate is at a two-decade high, due to consumers remaining fearful over the future of the global economy.

CommSec economist Savanth Sebastian says the result shows the Australian consumer is still cautious.

“There’s no sign at the moment that conservatism shown by consumers is going away,” Sebastian says.

“Consumers are a lot savvier in that they’re paying off significant proportion of credit card usage before the interest kicks in.”

“Consumers still prefer to use existing cash facilities. This has affected the business sector – businesses continue to find trading conditions very difficult.”

As the figures are not officially broken down by sector, the increased use of credit cards by business owners for business expenses has likely masked a wider fall in consumer usage of credit cards, according to Dowling.

“You’d have to assume the consumer usage is being reduced at a much deeper rate,” he said. “There is a bit of masking.”

East & Partners estimates business usage of credit cards will climb to 40% of total Australian credit card balances in 2012.