SMEs face a big recovery hurdle – the banks: Gottliebsen

Recovery is breaking out all over Australia. Survey after survey is reporting better trading conditions and a surge of optimism, albeit from a low base. However, buried in most of the surveys is a nagging problem which is showing no signs of going away – small and medium-sized enterprises (SMEs) cannot get the bank funding they need.

What we are looking at is a fundamental structural change in the banking system. Our banks are saying that they now believe that smaller enterprises carry much higher risk than previously calculated, so they are charging them higher interest rates and are reducing credit lines. And any new customer asking for a loan is usually shown the door unless that newcomer has a huge amount of equity in their house.

Unless Australia can find a way to finance smaller enterprises the recovery will not boost employment to the level we expect because SMEs are the major employers of labour.

Among the surprising victims of this change in attitude by the banks is a group that never dreamed they were vulnerable to the difficulties in the small business sector – those with large sums now frozen in mortgage funds. Very often these mortgage funds obtained high returns by lending on the security of the real estate of smaller enterprises. Too many of the businesses simply can’t find replacement finance and in due course may have to sell their properties. Accordingly, this change in bank attitudes will also have long-term implications for the value of real estate used by smaller enterprises.

Many enterprises have taken to delaying paying their bills which makes them even less attractive to the banks, further restricting their ability to grow.

Business Spectator’s financial services blogger, Nick Samios, whose expertise is in SME finance, expects a rise in the number of smaller enterprises going to the wall when they file their accounts with their bankers this month and has raised doubts about the ANZ’s new advertising campaign.

The Government understands the dangers, but can do little, although it has set up a help line.

One hidden danger, which has alarmed bankers, is the latent retrenchment benefit costs in many enterprises, which is not reflected the accounts.

The latest Dun & Bradstreet survey, which is full of recovery messages, includes a warning about SME debt: “45% of firms indicated that credit market conditions are detrimentally impacting their business (an increase of 2% in one month). 35% of firms plan to reduce their debt levels in the December quarter while only 10% plan to increase debt.”

Sensis, in talking to Yellow Pages customers, reports very similar conclusions to Dun & Bradstreet.

Yet another survey, by DBM Consultants, assessed more than 1,000 enterprises with revenues of less than $50 million during the first week of August. DBM managing director, Dhruba Gupta, said that even among smaller enterprises that had a positive business outlook and were planning to borrow to grow their business, 65% were expecting greater difficulty in obtaining bank finance.

“They would seem to represent reasonable credit risks, and are certainly potential drivers of economic recovery, but most are saying they don’t like their chances of getting lending support,” Mr Gupta said.

“It is clear that banks are now asking for a lot more security to support borrowing applications relating to expansion plans,” the DBM survey concludes.

In my view, when the Government ends its stimulus program and interest rates begin to rise, the SME funding problem will still be there, unless we see a dramatic change in attitude by the banks. While larger enterprises have recapitalised their balance sheets, small enterprises are still struggling.

And if, during the next few years, there is a return to sluggishness, watch the bad debts skyrocket because the smaller enterprises do not have the inner strength they had when the 2007 downturn started.

This article first appeared on Business Spectator.