From The Australian Financial Review:
‘Neil Slonim, a consultant who helps medium-sized companies and larger family businesses deal with the banks, also runs a not-for-profit small business advocacy organisation called The Bank Doctor.[…]
‘He says SME [Small and medium sized enterprises] credit has tightened substantially since the start of the royal commission, with frontline bankers and credit departments now going through loan applications in extraordinary detail.
‘Partly this is process-driven in that there are now more levels of authority a loan must pass through and more oversight.
‘As Slonim says, where you once had to tick eight out of 10 boxes to get a loan, you now must tick all 10.[…]
‘“The way bankers are being rewarded is shifting away from sales targets,” Slonim says.
‘“Previously, bankers were under significant pressure to sell. Now they are under pressure to pass their compliance gates and not to make a bad loan. It’s no longer worth their while to back an SME borrower if they have even an inkling that the loan could go bad.
‘“They are unlikely to lose their job for failing to make sales targets but they may well do so if they write a bad loan or fail their compliance gates.”’
Small businesses are one of the drivers of growth for Australia.
At a time when mortgage lending and the housing market is slowing, banks are probably counting on business spending to pick up.
NAB, who is one of Australia’s main lender to small and medium companies, forecasts business credit growth will beat housing loan growth in 2018 until June 2019.
Yet business investing has been declining in the last years, as you can see in the graph below.
Credit conditions tightening could mean a slowdown in growth
The thing is, house prices are also falling
There are currently 2.2 million small businesses in Australia. And, as The Sydney Morning Herald reports, a third of the loans to small businesses are backed by properties, in many cases a family home.
Falling property prices in Sydney and Melbourne may make it harder to get credit or to refinance an already existing business loan.
As News.com.au recently reported:
‘Falling real estate prices have endangered small business owners who used their homes as guarantees on business loans, an insolvency group has warned.
‘Experts from business recovery specialist Jirsch Sutherland said many small business owners used the equity acquired on their homes during Sydney’s recent property boom to secure financing.
‘They now face an uncertain future, the group said, considering banks were raising rates and CoreLogic data showed the median price of Sydney homes fell 5.6 per cent over the past year.’
Falling property prices and credit tightening may mean existing businesses could struggle. But, it also means that people wanting to set up a business may have it tough.
As you probably already know, younger people are also having a hard time getting into the property market…which then makes it hard for them to get a business loan.
You see, banks will loan money for a business up to a certain amount. For higher loan amounts, the bank may require a borrower to have some collateral.
That is, the borrower will either need to own an asset or high cash equity.
But this can be hard if young people are priced out of the property market and there is low salary growth. If they have neither cash nor an asset, they may use a parent’s home to guarantee the loan.
Which could have an effect on the finances of older generations.
The problem is that small business lending tightening and falling property prices will make it hard for young people to set up a business…or to buy an existing one. Which will affect baby boomers who own a small business and are counting on selling it to retire.
Struggling small businesses could also affect the unemployment rate. Small businesses employ a large number of Australians.
According to the Australian Bureau of Statistics (ABS), about 70% of employing businesses have between 1 and 4 employees while the share for businesses with over 200 people is 0.5%.
Many of these are in retail, as you can see below:
As we have written before, consumers in Australia are stretched. Salary growth is stagnant and higher costs of living mean that affordability is worsening. While consumer spending makes up 60% of the economy, households are already cutting down on unnecessary spending.
And small businesses are already feeling the pinch as consumers spend less.
Things could get even tougher if there is also a crackdown on business credit, home values keep dropping and banks keep raising loan rates.
Editor, Markets & Money
PS: Author and economist Harry Dent thinks the next big crisis is at our door step. We could be about to enter an ‘Economic Winter’…one that could freeze the Australian economy for years. If you want to learn more about Harry’s worrying forecasts, click here.