Westpac sees rise in demand for credit from medium-sized businesses, but expert says most SMEs are building cash reserves

Westpac says it has seen an increase in the number of medium-sized businesses taking on debt, despite one expert saying most businesses remain cautious and are building cash reserves.

Westpac has launched a campaign aiming to lend $1 billion to Australian businesses by the end of September by offering a series of financial incentives to small and medium enterprises who borrow from the banking giant in this period.

Westpac head of retail and business banking, Rob Coombe, told the Australian Financial Review that the environment for lending remained subdued, but medium-sized companies with between $20-50 million in revenue were lifting borrowing levels.

Coombe said he was surprised an SME-targeted campaign the bank ran between March and June failed to excite smaller businesses.

“We thought the campaign would be quite attractive to the small businesses because they tend to be more entrepreneurial.”

“But actually, the big pick-up in demand has been from the medium-sized companies.”

Core Data analyst Andrew Inwood remains sceptical of a small and medium enterprise expansionary phase despite the comments.

“Small businesses are building cash like you wouldn’t believe,” he says.

“On average they have four months of cash in reserve. It’s the highest we’ve ever seen in the 10 years we’ve been monitoring it.”

Inwood says this cautious building up of cash reserves, which began in October 2007, is far above the long-term average of six to eight weeks’ worth of cashflow that businesses typically hold. He says the increase in cash holdings is being driven by businesses adjusting to the structural changes in the economy that began in the global financial crisis.

Inwood says businesses were deferring a large amount of discretionary spending, as spending was typically driven not by a business’s net financial position but by their expectations of future income.

“As soon as they get some certainty about the economy, they will start to spend.”

He cited government policy as creating uncertainty for many businesses, which even if they were not directly targeted were “very sensitive to the zeitgeist”.

However, Core Data has also seen some encouraging signs, with the drive to cash flattening out in recent months.

“There are some signs of a return to borrowing, but not enormous signs,” Inwood says.

Coombe says the resurgence in borrowing was confined to particular industries, such as healthcare, agribusiness, financial services and the property sectors.

This was echoed by Inwood, who says differences between sectors of the economy were far greater than the differences between states.