Businesses will need to address growing debt levels

More than 18 months of COVID restrictions have left some SMEs in a challenging position

Businesses will need to address growing debt levels

It’s been a long road over the past 18 months for businesses impacted by lockdown orders and other COVID-related restrictions. SMEs have faced a myriad of challenges, including those enterprises that have seen growth due to the shift in consumer behaviour over this time.

According to ScotPac group executive, client acquisition and asset finance Craig Michie (pictured), SMEs across some industries have been hit hard while others have thrived.

“Businesses have been impacted very differently,” he told MPA. “Some have actually been positively impacted.”

Those that have seen growth in customer demand since the onset of COVID include courier companies, suppliers to grocery and food, as well as beverage retailers. Many businesses have had to pivot to capitalise on growth opportunities. However, securing funding quickly in an environment where many lenders have taken a risk-adverse approach has not been without difficulty.

“On the other side of the coin there are many others who have been forced into reduced trading levels, even to the extend where they’ve had to close down temporarily last year and then a repeat in this year,” he said. “In some circumstances this has had terrible outcomes with some businesses failing and others hanging on. These businesses tend to be facing increasing debt levels without the means to repay as revenues are not presenting themselves at the moment.”

The industries that have been most hurt by lockdowns and other COVID restrictions include certain segments of retail and hospitality, as well as supporting businesses such as suppliers. While the travel industry has been severely impacted over the past 18 months, supporting industries have also felt the full brunt of travel restrictions.

“So many businesses support airlines,” said Michie. “There’s teams of businesses that provide cleaning, servicing, meals – all of these industries have really been impacted so significantly as those sorts of industries have virtually had to shut down.”

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For many businesses in impacted industries, the difficulties faced have been an outcome of COVID and the enforced lifestyle changes it has led to, but other factors have also come into play, said Michie.

“There’s a real change in the economy, more things being delivered meaning more couriers, more consumption from home,” he said.

While there has been government support in the form of JobKeeper to assist companies with paying wages, the myriad of other ongoing costs has proved a challenge for those with limited or no revenue.

“For these businesses, there’s really always a lot of other fixed costs,” said Michie. “Utilities, rent, finance payments on vehicles, equipment, mortgages. Debts continue to be incurred whether or not the business is trading, or at what level the business is trading.

“There’s still tax debt being incurred. Fortunately, for many, it seems the ATO hasn’t been coming down too hard and enforcing at the moment, but certainly debt levels are still growing there.

“Banks have offered some support. Much of this has been in the way of repayment moratoriums or government-backed SME loans, but again, that’s debt and debt continues to grow. That’s a factor that businesses in future are going to need to come to terms with.”

The pandemic has seen many people exact life changes and leave salaried jobs to start new enterprises. Many younger entrepreneurs nowadays aren’t property owners, while those that are, could choose to move away from using property as security against their business given the uncertainty stemming from COVID, said Michie.

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 “We know traditionally banks in Australia have liked to use property as a mechanism to secure business facilities – personal property in many circumstances,” he said. “It may well be that following this pandemic, business owners might be less ready or willing to offer their home. Maybe it’s an opportunity to look at business balance sheets to see what other opportunities are available to help support the cashflow needs of the business moving forward.”

Given its core business focus in the SME market, ScotPac has witnessed the resilience and hardworking nature of business owners firsthand throughout these challenging conditions, said Michie. He said it was important that SMEs thought about what the future would hold once vaccination targets were met and lockdowns were wound back.

“We’ve seen businesses pivot during the pandemic and change business models,” he said. “Gin manufacturers swapping to manufacturing hand sanitisers, other businesses manufacturers changing to PPE manufacturing.

“I do think those sorts of characteristics hold them in good stead but it’s making sure they are prepared, and it’s a good time for them to reassess what their requirements are going to be.”