Despite rising costs, high inflation, and an aggressive Tax Office chasing debts, Australian SMEs are remarkably positive about future growth. Kate Aubrey explores the SME paradox.
From the COVID-19 pandemic to rising inflation, small businesses have been navigating a swathe of challenges over the last couple of years. A culmination of government support through the lockdowns, alongside strong consumer demand and smart cash flow decisions saw many small businesses’ bottom lines grow in the aftermath of the pandemic, but things haven’t been looking quite as rosy recently.
The year 2022 saw inflation hit 7 per cent, sending the cost of goods skyrocketing for small businesses. A combination of ‘revenge spending’ saw demand for goods and travel spike (pushing up costs for businesses looking to meet this demand); record low unemployment meant wage expectations grew quickly; and, in its attempt to scale back rising inflation, the Reserve Bank of Australia (RBA) began its record-breaking cash rate hiking phase in May 2022, pushing up the cost of mortgage borrowing by 350 bps over 10 consecutive hikes (up until last month).
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However, the RBA has said — several times since the rate hiking cycle began — that households and businesses were “well placed” to manage the impact of higher interest rates, supported by the continued strength in the labour market and sizeable savings buffers.
In fact, the RBA’s Financial Stability Review for April 2023 revealed the business sector reported a stronger balance sheet than before the pandemic.
Managing director and finance broker Phil Verheijen at Professional Lending Solutions says there was a lot of easy and cheap money through the pandemic that didn’t require a lot of work.
“Back then it was ‘cookie cutter’ everyone was getting the COVID-19 loans and it was ‘click and away you go’,” Mr Verheijen says.
“Now, as a broker, you need to actually understand what you’re doing. You need to understand the cash flow cycle, and understand the drivers of people’s businesses and understand what the key risks and mitigations are to the success of their business.”
Acquisitions and growth
This year, a growing number of small businesses are looking to expand and grow through acquiring new products and services.
In fact, Banjo’s SME Compass report for 2023, which surveyed more than 1,000 SMEs across Australia, revealed that one in three SMEs are planning to acquire for growth in 2023, with 26 per cent in 2023 (up from 17 per cent in 2022) now turning to their finance broker for advice.
Mr Verheijen had observed similar findings, stating there had been an uptick in inquiries for people wanting to start their own businesses.
“They might be a tradie, maybe they are PAYG, and all of a sudden they’ve got a lot of equity [and think] ‘maybe I can be my own boss’,” he tells The Adviser. “When we’re doing business lending, the main thing that banks want to look at is what is the quality of the person going into it, will it work? What’s their history? Are they buying a retail store and they were in the army?!
“We want to make sure that it actually makes sense for them to move into this sort of business, that it’s then going to be successful.
“So [we’re] working with them, and basically relaying that to the lenders to make sure it is going to meet their policy. It’s our job as the broker to control that narrative to the bank.”
While business optimism has been running hot, inflation and input costs have been weighing heavily on many SME shoulders, with two out of three fearing inflation will be a barrier to growth, according to Banjo’s SME survey.
In addition, the RBA’s Financial Stability Review revealed while small businesses have been passing on the increased input costs to consumers, the impact of interest rates on household budgets could make this more difficult as consumer demand slows down.
SMEs seek cash flow amid ATO debt restart
Another cause of insomnia for SMEs is another form of debt: tax debt. It’s believed that one in five businesses have built up a tax debt accrued during the pandemic when the Australian Tax Office (ATO) relaxed its standards on chasing debts.
But the cruisy times are over with the Tax Office “hounding people” for money owned, Mr Verheijen says.
“The amount of inquiries I’m having for people to try and clear that because the ATO is now coming down hard,” Mr Verheijen says. “They’re starting to garnish, which means they can actually take your money out of your bank account to get what they’re owed.”
As a broker it’s important to reach out to clients and educate them on what it means for future serviceability.
“You need to deal with this before it becomes a problem,” the broker says.
“If we go to a major bank and try to apply for business finance, and there’s tax debt, 99 times out of 100 it’s a no.
“The [majors] won’t give you business finance, if you owe money to the ATO.
“Where we can help is a lot of our non-traditional lenders, non-conforming, second-tiers specialise in clearing that up.”
The role of the broker has been to “triage these clients”, clear their debt with a non-major for a short term, and then revisit the business lending proposition in 12 months’ time.
Dual applications
Indeed, the challenges small businesses have been faced with over the last few years haven’t gone unnoticed by the banks, with many “concerned about the future” for some small businesses, senior finance broker Grant Rheuben at Loan Market in Melbourne explains.
Mr Rheuben says banks are “quite nervous” about business conditions with supply chain issues, rising costs of goods, rising cost of labour, and interest rate costs rising.
As fears of an economic downturn loom, he had noticed banks wanting to take on “bricks and mortar” loans.
“We’re assisting clients in ‘dual applications’, where a home loan and business loan application is submitted simultaneously to a department of the bank that deals with small business lending,” Mr Rheuben explains.
“The business lending manager works with the broker to support the approval for the home loan and their business loan.
“You still have to follow all the compliance aspects of home loan lending, but it’s a dual decision, so they assess the home loan and business loan application simultaneously.”
“What it’s doing is offering the business owner a 30-year loan term, without business lending reviews being undertaken by the respective commercial lender, that otherwise does take place.
“There’s even a few lenders who operate in the residential lending space who do offer business lending as part of their home loan products.”
Mr Rheuben adds unsecured lending for business propositions and growth remains popular, however, acknowledging the role of non-bank lenders such as Banjo and Prospa in this space in supporting smaller businesses.
Businesses remain hopeful for the future
While bank confidence may have dipped slightly, ANZ’s Australian Economic Insights report for April 2023 forecast business credit to grow 5.5 per cent year on year as at December 2023 and 5.1 per cent in 2024.
In addition, Banjo’s SME survey noted a resounding 70 per cent of SMEs surveyed expect their revenue to grow in 2023 and for those expecting growth, much of their investment will be internally focused — driven by investing in product development and new technology.
“Most of the transaction were doing is the customer has a need, and as brokers, I think we need to understand the why and what is the need,” Mr Rheuben says.
Just as SMEs continue to plan, acquire, hire, and grow, the demand for mortgage brokers writing commercial loans has increased, too, with the Mortgage and Finance Association of Australia’s (MFAA) Industry Intelligence Service Report (IIS), reporting mortgage brokers who wrote commercial loans during the April to September 2022 period rose to a “new high” of 6,118 brokers.
Thus, with business confidence expected to remain elevated, the role of the finance broker will strengthen into 2023.
