Small businesses not borrowing: Westpac

Small businesses are still avoiding taking on debt from banks, despite a rise in loans going to medium-sized firms, according to Westpac.

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,” he says.

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

Such sentiments were no surprise to Core Data analyst Andrew Inwood.

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