In 2018-2019, small businesses contributed $418 billion to Australia’s GDP – equivalent to 32% of Australia’s total economy.

By employing 4.7 million people, small businesses are also Australia’s largest employer (Australian Small Business and Family Enterprise Ombudsman, 2020). Yet, despite being the lifeblood of the Australian economy, small businesses are considered high risk borrowers and the number of new small business loans being issued is falling.

New Small Business Loans on a Downward Trajectory

As a result of the coronavirus pandemic, the availability of credit to small businesses has tightened. Aussie banks have indicated that this largely falls down to the application of existing lending standards being more difficult to apply when the economy is stalling and a large amount of uncertainty remains. As small businesses have a higher default probability than both individuals and large businesses (Reserve Bank of Australia, 2020)¹, they have felt the impact of the pandemic on new credit applications the most. Given the abnormal circumstances, it might explain why we saw a fall in the total value of outstanding small business loans last year (Reserve Bank of Australia, 2020)².

However, SME access to finance has long been falling in Australia, even prior to COVID-19.

After peaking in 2015, new small business lending in Australia saw three years of continuous decline, resulting in the lowest level of new SME lending since 2012. The only years which saw a lower volume loaned to small businesses than 2018, were 2009 (the year succeeding the global financial crisis) and 2012.

SMEs Believe Access to Finance is Getting Harder

According to a recent survey with over 1000 Australian SMEs (Sensis, August 2020), 40% of regional businesses said it was more difficult to access small business loans since the start of the pandemic, whilst 35% of respondents in capital cities believed so. Overall, 37% of all respondents believed it had got tougher to access finance.

More than one in four businesses were actually knocked back for finance when they applied (26%), with this figure being worse in the bush (37%) than it was in cities (25%).

How Australia is Trying to Kickstart Small Business Loans

The Australian Government has rolled out a number of lending initiatives to boost SME finance, which include:

• Changes to the instant-asset write off scheme
• JobKeeper payments
• The SME guarantee scheme
• The term funding facility

Some of these policies have enjoyed more success than others. Operating for a number of years, the instant-asset write off scheme has boosted SME investment into new assets and a temporary increase in the threshold following the pandemic made perfect sense. The JobKeeper Payments have also been a lifeline for many Aussie SMEs in helping to retain staff.

Perhaps the least effective measures have been the term funding facility and the SME guarantee scheme.

The term funding facility is designed to lower the cost of capital to lenders from the RBA if they lend more to SMEs. It favours big banks however, who will tap into the RBA for liquidity for longer periods – alternative lenders and FinTechs, who access most of their capital on the secondary market, receive less benefit.

The SME guarantee scheme, particularly in Phase 1, appeared to have completely missed the mark and received very little uptake. Phase 2, which has been amended to extend the duration small business loans can be issued and cap interest rates for borrowers, is expected to perform slightly better and runs until 30 June 2021.

Small businesses in the start-up or growth phase without high quality collateral (such as a residential or commercial mortgage) continue to encounter difficulties with accessing external finance. Unsecured business loans are particularly difficult to access and more needs to be done to increase the visibility of alternative lenders and FinTechs who are more geared to providing unsecured business loans.