Three things government can do to save small business as Melbourne enters its second lockdown

By John Vaz, Monash University

The reimposition of stage 3 restrictions on metropolitan Melbourne is, as Victorian premier Daniel Andrews says, a matter of life or death. That’s also true for small businesses.

A further six weeks of stay-at-home orders for the city’s 5 million residents will kill off many small and medium sized businesses unless there are critical changes to federal and state government assistance policies.

Even with assistance many will not survive. But ensuring those that are viable are not lost is crucial to the recovery of both the Victorian and national economies.

Small businesses are the engine of economic growth. They are typically the first to innovate and respond to economic changes. The abnormal economic shock wrought by the necessary public health response to the COVID-19 pandemic means they have generally been hit hardest. Without policies and money to address their core needs, this second wave of restrictions will be a killer blow.

Three fundamentals

These fundamentals are absolute to the success of small businesses.

First, and most obviously, they need customers. Those providing essential local goods and services, such as groceries or health services, may cope. But those offering discretionary goods and services, such as hospitality, will suffer both from loss of foot traffic and suppressed consumer spending, as people save more in uncertain times.

Second, they need access to credit. This is much harder for small businesses to obtain than large businesses with assets. Small businesses are typically started by entrepreneurs who finance their endeavours with their own savings, through mortgaging their homes, or taking out personal loans.

They typically have extremely limited cash reserves to ride out tough times. Many juggle their bills from month to month to stay afloat.

Third, they rely on momentum. They grow by acquiring both customers and knowledge of their market. When repeat business stops, they lose that momentum. If they have to shed employees, they lose “business knowledge”, which sets them back even further in their recovery.

Calamitous damage

All economic slowdowns typically reduce demand, but this health/economic crisis has calamitously damaged all three aspects.

The federal government’s JobKeeper program and subsidies being provided through the Australian Taxation Office to boost business cash flow has enabled businesses to hold on to employees for now. But without customers or credit, even extending these measures beyond their scheduled September 30 end won’t be enough.

It’s my view it will take three to five years for consumer confidence and spending to return to pre-COVID levels. This assessment is based on past recessions where high unemployment prevailed, compounded by the novel problem that health fears will suppress consumer confidence long after the coronavirus is contained and things return to “normal” (or at least a new normal).

The Melbourne outbreak of COVID-19 underlines there is no quick fix to the COVID-19 crisis. The only light at the end of tunnel is a possible a vaccine, which might take years, or never be found. The economy must therefore adjust. Not all businesses are viable. To continue to indefinitely pump public money into direct grants to prop them up is unsustainable.

To do so will lead to “perverse” consequences – providing windfalls to businesses that would have failed anyway – as many small business ventures do – while providing inadequate support to those that are important and would have survived but for the crisis.

Three suggestions

Therefore I offer three suggestions.

First, continue JobKeeper and the tax office’s cashflow boost for as long as COVID-19 restrictions are in place. Businesses would need to apply for this on a month-by-month basis, and need to meet set criteria.

Second, the government should ensure easy access to low-interest loans for the next two to three years. Loans are more efficient than direct grants or subsidies. The fact the loans have to be repaid will encourage only those businesses with a good chance of being sustainable of seeking them.

Getting a loan is slow and hard for small businesses because banks scrutinise them due to the risk. Few small business have the skills to prepare the extensive documentation banks require. Banks will be motivated to lend faster and to more businesses if governments remove the risk by buying those loans.

To speed up the lending application process, there should also be subsidies to licensed financial advisers to prepare those applications.

Third, a system of subsidised vouchers for financial management advice from accountants and financial advisers (who are also mostly small businesses).

Financial services are critical for small businesses. In tough times it might be tempting to dispense with these services. But sound financial advice will be critical to business owners making the right decision – including whether they should be borrowing money to sustain their businesses, or making the hard decision to cut their losses and move on.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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