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SMB conditions improving but debt fears rising and access to finance cut-off, RBA report finds

Economic conditions for many small businesses in Australia began to improve in the second half of 2020 alongside the broader recovery from the severe economic disruption caused by the COVID-19 pandemic. While small businesses’ access to finance from lenders tightened in the early stages of the pandemic, various policy measures were provided to help support the provision of credit. However, lending to small businesses remains little changed. Businesses have been reluctant to take on more debt in an uncertain environment and, at the same time, many have been able to make use of a range of temporary measures that have supported revenues or allowed for deferral of payments.

The COVID-19 pandemic has adversely affected the business sector. Small businesses have tended to have been disproportionately affected because they are more likely to be in industries that have been hardest hit by the pandemic. This article provides an update to Lewis and Liu (2020), summarising how small business finance has evolved over the course of the past year or so.

Economic conditions for small businesses have improved to some extent

The economic recovery underway in Australia is flowing through to an improvement in conditions for businesses of all sizes. However, conditions are still somewhat uneven (Lowe 2021). Improvements in conditions have been more pronounced for larger businesses compared with smaller businesses. Small businesses have been disproportionately affected by the pandemic because they are more likely to be in industries that have been harder hit by the associated restrictions on movement, such as cafes, restaurants, arts and recreation. Indeed, while larger retailers overall have seen strong growth in their sales throughout most of the pandemic, sales at small retailers picked up noticeably only in late 2020, returning to be around the level where they were leading up to the pandemic.

Small businesses grew more confident about their outlook in the second half of 2020, alongside the broader economic recovery (Graph 1). In an ABS survey conducted in February 2021, around a quarter of small businesses reported that economic uncertainty was a factor influencing their upcoming capital expenditure plans; in August 2020 the share was around two-thirds (Graph 2). Consistent with this, non-mining firms upgraded their investment plans for financial year 2020/21 according to the ABS capital expenditure survey in the second half of 2020. And the increases in job openings and employment growth observed in late 2020 were particularly pronounced in industries with a high share of small businesses. Nevertheless, the level of employment remains below pre-pandemic levels in the industries most affected by COVID-19 restrictions. In addition, while conditions have improved overall, some small businesses remain in a tenuous position and are vulnerable to any further economic disruptions (RBA 2020).

Graph 1
Graph 1: Small Business Confidence
Graph 2
Graph 2: Uncertainty and Future Investment Plans


Lending activity has been little changed


New lending to SMEs has been little changed since the onset of the pandemic (Graph 3). This is despite interest rates declining to historically low levels in response to the package of measures introduced by the Reserve Bank, and the pick-up in economic activity in the second half of 2020. Lending to large businesses increased sharply in the early stages of the pandemic, as large businesses drew down lines of credit, but these funds were repaid over the rest of 2020.

Graph 3
Graph 3: Lending to Businesses

Take-up of the Australian Government’s $40 billion SME loan guarantee scheme has been low. By mid February 2021, around $3.4 billion of loans had been made to around 35,000 businesses under the scheme. The scheme was first enhanced in October 2020 by increasing the amounts that can be borrowed, allowing funds to be used for a wider range of purposes, and introducing more flexible collateral arrangements and repayment terms.[2] In March 2021, the scheme was enhanced for SMEs that had received JobKeeper in the March quarter. Those SMEs can borrow up to $5 million for up to 10 years (up from $1 million and 5 years previously), and the funds can now also be used for refinancing of some existing loans. In addition, the Government is guaranteeing 80 per cent of the loan under the targeted scheme (up from 50 per cent). The original scheme will remain open for SMEs until the end of June 2021. Through the scheme, some SMEs can access unsecured loans at interest rates comparable to those charged on secured loans. Some lenders announced further reductions in interest rates on scheme-backed loans after the Reserve Bank provided further policy stimulus in November 2020 (RBA 2021).

Many businesses have less appetite for taking on additional debt

Survey data and liaison with businesses and banks suggest that many businesses, particularly SMEs, have little appetite for taking out new loans. In part this reflects ongoing uncertainty about the economic outlook. Many businesses have also had a reduced need for external finance because they have made use of support measures to help cover operating costs, and have built up cash buffers over the past year (RBA 2020). Consistent with this, an ABS survey in October 2020 found that three quarters of businesses had not sought any additional funds in the months leading up to the survey; the same share in February 2021 was around 85 per cent. The most commonly cited reason for not seeking additional funds in both surveys was the business having sufficient funds at hand. Other survey data show that fewer businesses tried to access finance in late 2020; a key reason for this was that businesses indicated that they were more likely to draw on savings than take out a bank loan if they needed additional funds (Graph 4). More generally, businesses tended to prefer to use retained earnings to finance investment when possible because it is less costly (Connolly and Jackman 2017).

Graph 4
Graph 4: Small Business Access to Finance

Although SME lending has been little changed for some time, there have been some pockets of increased activity. Commitments for new loans increased a little over the second half of 2020, to be around the average level observed over the 6 months preceding the pandemic. Most of this increase was driven by new loans for the purchase of property and for purchasing plant and equipment. Lending activity for plant and equipment has been supported by the Australian Government’s enhancements to the instant asset tax write-off scheme. Lending to the agriculture sector picked up in 2020, consistent with improved conditions in the sector.

In addition, refinancing activity has been higher so far in the financial year 2020/21 compared to the year prior, consistent with businesses looking to obtain lower interest rates on existing facilities (Graph 5). Moreover, large businesses and SMEs have increased the size of credit facilities available to them over 2020, suggesting that they are continuing their cautious approach to managing access to liquidity (Graph 6).

Graph 5
Graph 5: SME New Loan Commitments
Graph 6
Graph 6: Business Lines of Credit



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