Caution dampens business credit demand

There is widespread caution among small businesses to take on credit, with demand falling 5.6% in the June quarter, new research has shown.

Veda Advantage’s Business Credit Demand Index revealed that the demand for business credit fell in every month of the quarter, compared with the same period last year.

Take-up of credit dropped by 4.4% in April, 1.3% in May and 10% in June. The slump in demand in June was the largest drop in six months.

The current quarter looks like continuing this trend, with demand slipping by 2.1% in July, year-on-year.

Demand is down 9.8% on the same quarter in 2007 and down 6.1% on the same period last year. All states were down year-on-year, with NSW worst hit with an 8% dip.

Hamish Osborn, head of commercial Risk Products at Veda Advantage, says: “While credit demand is growing slowly in volume across 2010, it has not yet returned to pre-global financial crisis levels.  Last year may have been artificially bolstered by government stimulus activity and based on this we can expect a drop off in year-on-year demand, although we did not predict the large drop off in June.”

“This index demonstrates the market remains cautious. Small business seems to be hesitant in the post global financial crisis economy despite some large contracts and firm pricing agreements in the export and bulk commodities markets which are currently boosting the economy.”

“Tough lending practices have not been relaxed since the global financial crisis, which means companies with tight credit control and cashflow management are probably more likely to be granted credit from financial institutions. In light of this we urge all businesses to incorporate credit risk management practices to maximise liquidity and to minimise the threat of taking on bad debt.”

Osborn advised start-ups to take several steps before extending credit, saying: “There needs to be a proper evaluation of a business partner, including a credit check and business history. You can have alerts sent out against companies and retain good customers. If you follow these steps, you can protect your cashflow.”