Business lending at a crossroads: Can SMEs overcome mounting challenges?

Business insolvencies remain stubbornly high. Over the month of April, 1,255 businesses shut doors, according to recent CreditorWatch data.

Compared to the same period last year, these figures were up 17 per cent. Meanwhile, invoice payment defaults were up 42 per cent.

Clearly, the cost-of-living crisis is continuing to impact businesses. CreditorWatch CEO Patrick Coghlan said it is especially pronounced in industries that rely on consumer spending.

“Households don’t have many levers they can pull to save extra money, but they can certainly reduce costs in areas such as entertainment spending, retail purchases, services such as cleaners and gardeners and, on a larger scale, put off building a new house,” he said.

“We particularly feel for small businesses that typically have smaller cash buffers than larger businesses and are less able to take measures to cut costs such as laying off staff or closing locations.”

The industry hit the hardest by these challenges is hospitality. In fact, one in 10 (9.6 per cent) hospitality businesses across the country were forced to close in the past year.

By far the worst affected, others still had challenges. The administrative and support service industry; arts and recreation services; and transport, postal, and warehousing saw 6.5 per cent, 6.3 per cent, and 6.2 per cent of businesses close, respectively.

The top three worst-affected states for hospitality closures were South Australia (10.8 per cent), Queensland (10 per cent), and Victoria (9.9 per cent).

“When households feel the pinch from interest rate rises and price increases, they typically spend less at places like cafes, restaurants, bars and pubs. The increase in people working from home has also had an impact, mainly in outlets in CBD areas,” Coghlan said.

“On top of that you have the business cost increases in areas such as wages, electricity, insurance and food and alcohol.”

Coghlan said you usually don’t see a major turnaround in spending until multiple rate cuts are actioned.

What are the top concerns for business owners?

With insolvency risk high, there are a variety of issues contributing to this stress.

According to NAB’s SME Business Insights, cash flow was recognised as the most pressing concern for 43 per cent of respondents (up from 34 per cent in the same period last year).

Meanwhile, profitability was a bigger concern, up from 30 per cent last year to 38 per cent currently.

However, there has also been some relief. Inflation and concerns about the cost of doing business dropped from 33 per cent to 30 per cent.

Concerns over staff turnover and labour shortages fell from 35 per cent to 29 per cent, government policies and red tape from 35 per cent to 27 per cent, and interest rates from 16 per cent to 10 per cent.

How are SMEs responding?

The same NAB survey highlighted some measures business owners are taking to mitigate challenges.

Half of the respondents said they’re looking to cut costs and seek better terms with suppliers.

Another 37 per cent said they were looking to increase marketing, 29 per cent are reviewing cash flow and working capital processes, 28 per cent are investing in training and hiring, 28 per cent are adjusting pricing strategy, and 27 per cent are improving customer communications and management.

The impact on brokers

While the recent RBA cash rate will offer some relief for borrowers, the future of business lending activity is less clear.

Research from Equifax revealed that in the lead-up to the RBA cash rate decision, business lending picked up.

Overall, business credit applications increased 1.6 per cent between 1Q24 and 1Q25 and business loan applications grew 3.9 per cent.

However, asset finance applications fell 2.3 per cent and trade credit applications dropped 3.3 per cent.

Equifax’s general manager, commercial property and services, Scott Mason, said uncertainty in business lending is likely to continue.

“The dual pressures of long-term high interest rates and increased market unpredictability have had a significant impact on small and medium business in particular,” Mason said.

“Without credit, expansion is difficult for SMEs. The reduced demand suggests that SMEs are battening down the hatches and focusing on efficiency gains through cost cutting rather than productivity gains that rely on investments, like technology, training or hiring.”

[Related: Seasonal trends likely to impact SME clients]

Jack Campbell is the editor of Broker Daily. After graduating from the University of Wollongong in 2022, Jack began his journalistic career working on Broker Daily’s sister brand, HR Leader. In August 2023 he was made the news editor and worked alongside some talented journalists writing articles and recording podcasts.

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