Small Business & the Credit Squeeze

By: AUSBUY

Profits are down, debtors are slower to pay and money is harder to borrow for small businesses. This is a real cause for concern as small business is vital for our economy and make up the majority of private sector jobs. Much anecdotal evidence has been produced to support this fear and in an orgy of bank bashing the media have rushed into the fray supported by the government who recognise a hot political topic when they see one – good politics but poor economics. There certainly is a problem but on close examination of the facts is more likely to produce a solution than emotional reactions. Among the problems are:

• Economic activity, and with it the profitability of smaller companies, has dropped. This generates a greater need for cash but makes it harder for the credit managers of the lenders to support the application for a loan.
• Small businesses get most of their borrowings from Australian banks who have, under pressure from investors and government, have had to strengthen their own lending criteria. This produces the situation where government urges the banks to lend more freely but on the other hand criticises them for causing the current problems by lending to freely. Meanwhile the banks have had to raise more money themselves to support the existing level of credit so they sensibly ignore the media and government.
• Small business owners have traditionally used their property as collateral for borrowings. Falling property prices decrease the value of the security they can offer.
• Small business cannot access the bond market, raise new equity or use the commercial money market the way large corporations do.

The importance of small business in Australia cannot be overestimated as a generator of employment. However the banks revisiting the sins of the past and creating a new sub prime problem does not make sense in an area where the banks own capital adequacy provisions are under pressure. The present rhetoric is political posturing and should be treated as such. Instead we must look for new solutions. We could consider the following:

• Land tax, payroll tax and other levies should be adjusted or waived for small businesses that are providing new jobs. Any waivers should have a sunset clause.
• The government should provide special purpose finance to be administered by the banks on a no profit basis (cost recovery) to advance money to stressed companies who have failed to meet normal requirements. The terms and conditions of such loans should be carefully documented and the scheme must not be used by the banks to get rid of their existing problem debts.

The above steps will not solve the problem but they may help to restore confidence in this vital sector. We must remember that the small businesses of today may become the big businesses of tomorrow.

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