Are Small Business Loans Getting More Difficult to Access?
In 2018-19, small businesses contributed $ 418 billion to Australia’s GDP, equivalent to 32% of Australia’s total economy.
Small businesses are also Australia’s largest employer, employing 4.7 million people (Australian Small Business and Family Enterprise Ombudsman, 2020). Yet despite being the lifeblood of Australia’s economy, small businesses are seen as high risk borrowers and the number of new loans to small businesses is on the decline.
New small business loans on a downward trajectory
Due to the coronavirus pandemic, the availability of credit for small businesses has tightened. Australian banks have indicated that this is largely due to the fact that enforcing existing lending standards is more difficult to enforce when the economy is at a standstill and a large amount of uncertainty remains. Since small businesses have a higher probability of default than individuals and large businesses (Reserve Bank of Australia, 2020)??, they are the ones who have felt the impact of the pandemic the most on new credit applications. Given the abnormal circumstances, this could explain why we saw a decline in the total value of outstanding small business loans last year (Reserve Bank of Australia, 2020)².
However, access to finance for SMEs has been declining in Australia for a long time, even before COVID-19.
After peaking in 2015, new lending to small businesses in Australia experienced three years of continuous decline, resulting in the lowest level of new lending to SMEs since 2012. The only years in which the volume of lending to small businesses was lower than in 2018 were 2009 (the year after the global financial crisis) and 2012.
SMEs think that access to finance is becoming more difficult
According to a recent survey of over 1000 Australian SMEs (Sensis, August 2020), 40% of regional businesses said it has been more difficult to access small business loans since the start of the pandemic, while 35% of respondents in capital cities thought so. Overall, 37% of all respondents believed that it had become more difficult to access funding.
More than one in four businesses were refused funding when they applied (26%), with this figure being worse in the bush (37%) than it was in cities (25%).
How Australia is trying to launch small business lending
The Australian government has launched a number of lending initiatives to boost SME finance, including:
- Amendments to the write-off regime for instant assets
- JobKeeper Payments
- The SME guarantee scheme
- Term financing facility
Some of these policies have been more successful than others. Operating for several years, the Instant Asset Write-off program boosted SME investment in new assets and a temporary increase in the threshold following the pandemic made perfect sense. JobKeeper payments have also been a lifeline for many Australian SMEs by helping to retain staff.
Perhaps the least effective measures were the term finance facility and the SME guarantee scheme.
The Term Finance Facility is designed to reduce the cost of capital for RBA lenders if they lend more to SMEs. However, it favors the big banks, which will tap into the RBA for liquidity for longer periods – alternative lenders and FinTechs, which access most of their capital in the secondary market, get less benefit.
The SME guarantee scheme, especially in phase 1, seems to have completely missed the mark and has received very little interest. Phase 2, which has been changed to extend the terms of small business loans and cap interest rates for borrowers, is expected to perform slightly better and will run until June 30, 2021.
Small businesses in the start-up or growth phase without high-quality collateral (such as a residential or commercial mortgage) continue to face difficulties in accessing external financing. Unsecured business loans are particularly difficult to access and more needs to be done to increase the visibility of alternative lenders and FinTechs that are more geared towards providing unsecured business loans.