A survivor’s guide to crunch time for SMEs

"The next six months will be very telling"

A survivor’s guide to crunch time for SMEs

This article was produced in partnership with Prospa

The far-reaching effects of higher interest rates are coming home to roost for a number of small to medium enterprises.

Increased costs of borrowing reducing the flow and impact of money, higher barriers to obtaining loan approvals, deferred investment decisions and reduced consumer spending as people tighten their purse strings are some of the manifestations that leading non-bank lender Prospa is currently seeing.

Research conducted by YouGov and commissioned by Prospa earlier this month shows 88% of Australian business owners and decision makers anticipate major challenges for their business in the next 12 months.

The top concerns at the start of 2023 for SMEs were increased operating costs and higher inflation but this has now been overtaken by reduced consumer spending.

“When interest rates rise, the cost of borrowing for consumers increases. This can lead to reduced consumer spending as individuals may have less disposable income or be more cautious about taking on new debt,” says Roberto Sanz, National Sales Manager at Prospa (pictured above).

While data shows monthly household spending is so far holding up, those businesses that rely heavily on consumer spending, such as retail, hospitality, or luxury goods, are worried that they may experience a prolonged decline in sales.

Building and construction is another sector that is struggling.

“The building and construction industry has been hit with a number of challenges, including rising cost of materials, supply chain issues, skills shortages, and regulatory and policy changes,” says Sanz.

When borrowing becomes more expensive, companies may traditionally consider postponing or scaling back their plans for expansion, new projects, or acquisitions.

“This can have a longer-term impact on industries related to construction, real estate and infrastructure development,” says Sanz.

Who is accessing funding and for what purpose?

Prospa-commissioned research shows that 30% of Aussie small business owners expect to borrow external funds over the next 12 months to support the needs of their SME.

The average amount they except to borrow over this time is $25,585.

More than seven in ten of these businesses expect to use those funds for future expansion, a noticeable increase from the just under two thirds who pegged funds for this use at the start of the year. On the flipside, 63% now expect to use funds borrowed to cover rising business costs or expenses in the short term (versus 69% in January). Taking a deeper dive reveals an interesting mix of intentions among business owners that suggests while some businesses are still battling inflation’s pernicious effects on their operations, at least some are looking to the other side of this rough patch.

The most commonly expected uses of externally accessed funds are:

  • getting through a difficult period/covering unexpected expenses (latest 30% vs January 32%)
  • upgrading or purchasing new equipment (latest 26% vs January 23%)
  • covering increased cost of goods and services (latest 25% vs January 32%)

These are followed by:

  • expansion into new markets (latest 23% vs January 18%)
  • investing in digital technology (latest 22% vs January 23%)
  • covering reduced income (latest 21% vs January 14%)
  • increasing staff numbers (latest 18% vs January 15%)
  • covering increased transport/logistics costs (latest 15% vs January 20%)
  • upskilling/training (latest 14% vs January 21%)

What can brokers do to help business meet the challenges?

Sanz recommends that SMEs should review their business plans regularly, always make sure they understand their current cash flow position and seek the advice of experts.

Perhaps the key takeaway is that the situation is dynamic, so none of the above tasks are ever complete.

“Remain flexible and open to adapting your strategies or operations to seize new opportunities or mitigate risks,” he says.

Brokers are always aware of the latest market conditions as they speak to a wide range of industry players daily as part of their work – they are often like a walking survey of local business conditions.

Brokers can also help SMEs get a better rate for any funds borrowed.

“When negotiating a better rate, it's important that lenders understand the full picture of your business. Businesses should communicate their strong points – how long have they being trading? Has the business grown its customer base? Have margins on products or revenue increased?”

From trying to find new customers to rising fuel prices to other competitors in the market, there is no shortage of factors keeping small business owners up at night. But Sanz sees one factor as the first among equals.

“Consumer spending is the one that we will need to monitor. If rate rises continue, and discretionary spending continues to slow, this will have a flow-on effect for key industries,” he says.

With eleven rate rises since last year, the exit strategy to the Reserve Bank of Australia’s inflation-taming campaign will be crucial for SMEs.

“The next six months will be very telling.”

It may become a case of which companies get the timing right about when to commit to new growth that will separate the winners from the also rans.

More than four in five Australian business owners and decision makers still anticipate growth for their business over the next 12 months, with most expecting that growth to be at least partly driven by new clients on the back of referrals or advertising, rather than business expansion or into new domestic or internal markets.

“This is where funding from Prospa can help make a difference to realise those growth opportunities,” says Sanz.

** All figures, unless otherwise stated, are from YouGov Galaxy Pty Ltd. The surveys were carried out online. The figures have been weighted and are representative of all Australian business owners/ primary decision makers of businesses with fewer than 50 employees. Fieldwork was undertaken between 26th April - 4th May 2023 with a total sample size of 511. 

Prospa is a leading fintech with a commitment to unleash the potential of every small business in Australia and New Zealand. We do this by developing the simple, stress free and seamless financial management and lending products they need to make business happen. Since 2012, we have provided more than $3.4 billion of funding to support the growth and operations of thousands of small businesses. We also work with more than 14,000 trusted brokers, accountants, and aggregator partners, to deliver flexible funding solutions to their clients. Find out more at www.prospa.com