Credit crunching small business growth: SmartCompany Poll

Australia’s fast growing companies are shelving expansion plans because of the credit crunch and rising interest rates, a SmartCompany poll shows. This will affect employment, the purchasing of new equipment, and could see some businesses go to the wall. 

The SmartCompany poll of 100 small and medium businesses (up to 500 employees) reveals that 28% have already been directly affected, agreeing that it is harder to get credit from their bank and other lenders.

Almost a third (31%) say they are downsizing growth and expansion plans because credit is harder to get and more expensive.

This sector is also very vulnerable to future rising interest rates, with 71% saying they are worried.

The survey serves as a stark warning to the Reserve Bank that further rises in interest rates will have a devastating affect on the small and medium size business sector and entrepreneurs.

Insolvency experts have already told SmartCompany after many lean years there is a spike in inquiries from companies in trouble.

It is Catch 22. Recent figures from the Australian Bureau of Statistics give an interesting insight into why businesses borrow money. In 2005-06, about 18% of businesses sought debt or equity finance, with businesses employing 20 to 199 people being the most indebted (32%).

Of businesses that sought finance, 91% sought debt finance and 24% sought equity finance. Worryingly, about 29% sought the finance to ensure the survival of the business and 40% needed it to maintain short term cash flow or liquidity.

A further 21% sought the finance to expand the business, and for replacement of software or equipment such as IT hardware.

Interestingly 90% of companies say they got the money, which meant the businesses survived, expanded, bought equipment and received assistance for cash flow problems.

This suggests that the credit crunch will have far reaching implications on businesses, not just those in trouble or forced to shelve expansion plans but also the companies that would otherwise sell equipment to these businesses.