Understanding the market for small business loans in 2021

This article was current at the time of publication.

As economic growth rates continue to improve across Australia and New Zealand, demand for finance from the small business sector has also been steadily increasing.

It's a welcome turnaround given the immense challenges faced by small-to-medium enterprises (SMEs) since the onset of the COVID-19 pandemic.

However, is the increase in demand for finance from SMEs during a time of record low interest rates being accommodated by banks and other business lenders?

According to data from the Reserve Bank of Australia and Reserve Bank of New Zealand, business lending by banks has been falling, while there has been a lift in lending by non-bank financial institutions.

Reopening lending channels

Quantum Business Finance Director David Gandolfo says lending channels are gradually opening for small businesses in Australia. These include loans where business borrowers can lodge streamlined applications without the need to provide detailed financials.

"It's like we've gone down a slippery slope and we're starting to come back up it," Gandolfo says.

"Now, we're starting to see lenders come back into the market with some streamlined products. The Big Four banks and their subsidiaries and mainstream asset finance and commercial lending providers have also started to [return]."

Gandolfo says banks have committed to ensuring the credit ratings of businesses will not be impacted even if they have taken up the option to defer tax debt payments.

"They have also said that they will take into account JobKeeper cash flow.

"They'll also break out other costs that were specific to COVID, like relocating staff and [training] people to be able to work from home, taking into account that there was an economic slowdown and most businesses didn't have the capacity to trade normally."

Still tough for working capital in New Zealand

Dave Armstrong, Director of Christchurch-based SME finance specialist Newbrook Private Capital, says demand for finance in New Zealand is rapidly increasing, especially for working capital over funds for capital expenditure.

"This would indicate to me that businesses are growing, so working capital is stretched, but there's a reluctance to invest in new plant," Armstrong says, adding that access to finance is still being impacted by COVID-19.

"Banks and funders are looking at what the impacts of another lockdown would do to the industry. Business confidence, though, is rising, and people are genuinely busy, so I think that has seen an increase to some credit availability."

Armstrong notes that despite higher demand, business lending volumes in New Zealand have been declining for some time.

"Lending conditions for SME businesses are tough at present, with access to capital lowering from the main banks, which has seen an increase from non-banks," he says.

"On average, most SMEs are required to provide equity in a property to secure a loan from the bank, but there is an appetite for asset finance and some small unsecured lending from the non-bank sector.

"The levels typically cap out at $150,000 and there's high interest – 15 per cent-plus from non-banks compared to, say, 5-6 per cent from a main bank – so this is a real challenge and has even seen some business owners resort to credit cards for access to capital."

Getting business finance-ready

To become finance ready, SMEs should ideally have their accounts up-to-date, even if they haven't been finalised.

Gandolfo says there are generally more lending options available if there's no outstanding tax debt, so it’s best to make other arrangements with the Australian Taxation Office (ATO).

"Also, to the best of your ability, have a cash flow forecast," he advises."

"What you're telling the prospective lender is that you've got a plan and that you know how you're going to achieve it. If you've got a forecast that's based on assumptions you can verify, then it will hold weight."

Additionally, he says paying bills on time and maintaining your credit standing and score are also important.

Australia's consumer protection laws

Meanwhile, to facilitate lending in Australia, the federal government has maintained its exemption from responsible lending obligations for lenders providing credit to existing small business customers.

The National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2019 removed responsible lending provisions for SMEs except where they apply to high-risk lending.

The exemption applies to any credit for business purposes, including new credit, credit limit increases and credit restructures.

According to Gandolfo, there is still a grey area where family business owners use personal assets, such as their house, as security for commercial loans.

"The legislation is quite clear that it's the purpose of the loan, and not the way the loan is structured or who the borrower is that should determine if consumer credit protections apply," he says.

"What we want is a clear delineation that it doesn't apply to the commercial lending space."

Warning to practitioners

Loosening lending rules in tough economic times may encourage creditors to further rely on 'accountants letters'. CPA Australia has long advised practitioners against signing these letters.