64 per cent of SMEs would not obtain a loan at an unfavourable rate, regardless of whether such a decision would stunt their business’s growth.
- More than a quarter (26 per cent) of SMEs won’t take out business loans if rates hit 7%, which has already been surpassed by major banks.
With many economists predicting a recession on the horizon in 2023, Australia is relying on successful industries to continue their growth to protect our economy from the two consecutive quarters of negative growth that define a recession. SMEs are the lifeblood of the Australian economy making up 98 per cent of businesses[1], but with their traditionally smaller budgets they generally require finance to enter periods of growth. Now, new research reveals that a quarter (26 per cent) of SMEs won’t take out a loan for business growth if rates hit 7 per cent, which has already been surpassed by a series of major banks. This jumps to 50 per cent of SMEs who will refuse to take out a business loan if rates rise to 10 per cent. In fact, two-thirds of business owners and senior decision-makers (64 per cent) would not obtain a loan at an unfavourable rate, regardless of whether such a decision would stunt their business’s growth.
The findings were derived from an independent survey commissioned by business loan comparison site Small Business Loans Australia seeking to discover whether rate rises will deter Australian businesses from the big four banks: Commonwealth Bank, Westpac, National Australia Bank and ANZ. Respondents were 210 business owners and senior decision-makers across the full SME spectrum: micro (1-10 employees), small (11-50 employees) and medium-sized (51-200 employees), as well as a small percentage of large SMEs (more than 200 employees). The full survey results, including breakdowns across business sizes and states, can be found here: https://smallbusinessloansaustralia.com/sme-big-bank/
In 2018-19, 15 per cent of businesses applied for finance, with 31 per cent using the funds for general business growth. Sixty-nine (69) per cent of such businesses borrowed their money from a bank and 33 per cent borrowed from another financial institution.[2]
Small Business Loans Australia asked respondents to consider any loans their business may require over the next two years and asked them to identify what level of interest rates would turn them off obtaining a loan from a bank. More than a quarter (26 per cent) of respondents reported that an interest rate of 7 per cent would deter them from acquiring a loan, while 14 per cent responded that they would avoid borrowing at an interest rate of 8 per cent. Ten (10) per cent of respondents indicated their limit as 10 per cent, while 24 per cent will cease taking out loans when interest rates reach 10 per cent or higher. Interestingly, almost one in 10 (8 per cent) would continue to borrow funds from the big banks, provided the interest rate remains at 15 per cent or under.
More than a third (36 per cent) of micro-businesses indicated that they would cease borrowing when interest rates reach 7 per cent, while 17 per cent of medium-sized and large businesses noted the same. This compares with just 3 per cent of small businesses that would be deterred from acquiring a loan at an interest rate of 7 per cent or higher.
Small Business Loans Australia found that business respondents across all States, would cease borrowing at an interest rate of 7 per cent. A third of respondents from Queensland (33 per cent) would be deterred from obtaining a bank loan at this rate, followed closely by South Australian and Victorian respondents at 32 per cent and 31 per cent, respectively. Meanwhile, only one in five (20 per cent) of respondents across NSW, Western Australia and the ACT indicated the same.
Would businesses choose between financing and growth?
Small Business Loans Australia asked respondents whether they would still postpone borrowing even if it meant that their business would not grow without it. Almost two-thirds (64 per cent) responded that they would not obtain a loan at an unfavourable rate, regardless of whether such a decision would stunt their business’s growth. Meanwhile, the remaining 36 per cent would continue borrowing to sustain the expansion of their business.
The survey found that large business are more prepared to continue borrowing at high interest rates to enable their business to grow, with 67 per cent of respondents of large businesses indicating that they would obtain a loan at an unfavourable rate if necessary. On the other hand, micro, small, and medium-sized businesses are less inclined to do the same: more than two-thirds (70 per cent) of micro-businesses contended that they would cease borrowing, while 46 per cent and 39 per cent of small businesses and medium-sized businesses, respectively, noted the same.
Alon Rajic, Founder and Director of Small Business Loans Australia, says: “Australian SMEs are showing promising resilience as interest rates continue to rise.”
“This year could be a period of growth for businesses in many sector, which in many cases will require a business loan. Most SMEs have established a clear cut-off point where interest rates will become too difficult to manage, which is imperative when choosing any loan. However, there is always a variety of differing interest rates available across lenders, and business owners should make sure to shop around and use a comparison service before taking out any new loans.”
The full survey results, including breakdowns across business sizes and States, can be found here: https://smallbusinessloansaustralia.com/sme-big-bank/
[1] Australian Banking Association. 2022. https://www.ausbanking.org.au/small-business/#:~:text=98%25%20of%20businesses%20in%20Australia,are%20small%20and%20medium%20enterprises.
[2] Australian Government. 2021. https://www.pc.gov.au/research/completed/business-finance