Login
ISCOVER
In this feature, we’re taking a look at the issues that are currently facing SMEs as we approach the holiday season and what brokers can do to help out these businesses
As 2022 draws to a close, businesses are gearing up for the busy holiday season. This year, although the looming threat of COVID lockdowns seems to be well and truly in the past, challenges still persist for many businesses in the wake of the current economic turbulence.
While the pandemic may feel like a distant memory for some, 2022 had no shortage of world-altering events, such as the war in Ukraine, which has shaken the world’s economy to its core. Rising interest rates, supply chain issues, and labour shortages, among other things, have plagued news headlines for the better part of the year.
Small and medium-sized enterprises (SMEs) in particular have felt the pressure from these issues, with many businesses struggling to return to pre-pandemic net profit margins by March 2022, according to the Reserve Bank of Australia (RBA).
The challenges facing SMEs
The RBA’s October 2022 Financial Stability Review revealed that inflation burdens, supply disruptions, and labour shortages have taken its toll on the profitability of SMEs, despite relatively strong demand.
The central bank recently flagged that unprofitable SMEs appeared to be especially vulnerable as lower profitability reduces debt-servicing capacity, which has been exacerbated by the impact of increases in variable business lending rates for some indebted firms.
“Currently, unprofitable SMEs appear particularly exposed, as they tend to be more indebted than profitable SMEs — and are therefore already more vulnerable to rising interest rates,” the RBA stated in its review.
“Larger firms are typically more indebted than smaller firms, but they also tend to have a higher capacity to service debt because they have more diversified and stable incomes.
“Overall, large businesses tend to have similar leverage regardless of whether they are currently profitable or unprofitable.”
In conjunction, the RBA observed that the average cash balances for SMEs are typically lower relative to their size and have been declining over this year, further suggesting that SMEs are more vulnerable to weak profit outcomes, leaving some SMEs having to rely more heavily on cash reserves to sustain operations or service debts.
Government assistance during the peak of the pandemic and the cash buffers accumulated may have resulted in business insolvencies remaining slightly below pre-pandemic levels and many businesses benefited from the strong economic recovery in 2021. But the RBA has predicted that more insolvencies are likely to occur as economic activity slows down and vulnerable SMEs draw down further on their cash reserves. This will particularly hurt businesses with high levels of debt or those who have not quite bounced back from the disruptions caused by the COVID-19 pandemic.
Moreover, the Australian Taxation Office (ATO) has begun resuming its enforcement activities on unpaid tax (following its pause during the pandemic), which is also likely to contribute to more businesses beginning formal insolvency procedures, especially those that aren’t in a position to pay off their debts, further adding to higher insolvency rates.
SMEs are still preparing for revenue growth
In spite of the “doom and gloom” facing the SME community, over half of SME owners were expecting positive revenue growth in October 2022.
A 6 per cent increase in confidence for positive revenue growth was observed through ScotPac’s SME Growth Index in October, which collected feedback from over 700 industry participants covering topics such as revenue forecasts, profit expectations, cash flow management practices, and growth financing intentions.
This boost in confidence comes off the back of easing COVID travel restrictions, according to the Growth Index. Further findings revealed that the average projected growth rate was 5–6 per cent, an increase of 37 per cent year-on-year.
However, it should be noted that not all SMEs were expecting a rise in revenue, with one in four small-business owners predicting revenue to decline by an average of 7 per cent in October 2022.
The forecasts from this particular study of 700 businesses were considerably varied, ranging from an increase of revenue by 10 per cent to a decline of 17 per cent, further solidifying the ongoing uncertainty in some parts of the economy.
Speaking to The Adviser, ScotPac’s group executive, client acquisitions and asset finance, Craig Michie, notes that SME owners and directors are “incredibly resilient and resourceful”.
“Responsible SMEs have reacted to supply chain disruptions, rising interest rates and rampant inflation by looking for ways to make their money work harder,” he says.
When asked about the sort of trends ScotPac is expecting to see in the SME finance world, Mr Michie flagged that recent ScotPac surveys indicated a surge in confidence and demand for finance over the next year.
“As working capital is the lifeblood of SMEs and a catalyst for growth, we anticipate steadily rising demand for invoice finance and flexible business loans,” he tells The Adviser.
“We also expect good growth in asset finance applications as global trade recovers further and SMEs look to take advantage of government grants and tax incentives for energy efficiency and technology-related investments.”
But brokers are well placed to help the SME community navigate change — particularly as many brokers are small-business owners themselves.
Mr Michie explains: “Brokers are trusted advisers to the SME community and their role is always more important in times of economic change.
“There are great opportunities for brokers who take the time to understand their clients’ needs and match them with the right finance solutions. They should be communicating regularly with their clients and sitting down to run a health check on their finances.”
His top tips for helping SMEs include:
- Examining whether a client’s existing finance facilities are still the best fit for their current situation
- Looking at any potential growth opportunities that could be unlocked through invoice finance
- Understanding whether it might be the right time to grow the business’ asset base
Indeed, brokers (particularly commercial finance brokers) have a wealth of skill and advice to pass on to business owners — and in tandem with the SME’s accountants — can have in-depth conversations to help them plan ahead for the future, and to stress-test various scenarios to best prepare SME owners for the years to come.
And small-business owners are incresaingly likely to turn to brokers for support in organising future financial plans.
Just as more and more home loan borrowers are looking to brokers for help accessing the right mortgage for them, SMEs are increasingly seeking help from the third-party channel to help them understand alternative financing methods, such as invoice financing to quickly alleviate cash flow problems or asset finance to help them acquire the equipment they need.
Lenders have been coming to the fore to help, too, expanding their broker services and product offerings to fill any gaps.
For example, Mr Michie states that ScotPac stands “ready to assist SME owners and brokers with expert advice and support”, with fast and easy application processes to access funds
He flagged the new partner portal that brokers can access, highlighting that its Asset Finance Fast doc application can deliver “instant approvals for all business types, including sole traders” while approvals can be made in as little as 24 hours.
“Brokers who register free for ScotPac’s market-leading Partner Portal will be giving themselves and their clients a head start,” Mr Michie concludes.
JOIN THE DISCUSSION