Small-business owners are adapting to persistent economic pressures with gusto, says RedZed’s Calvin Cordle
Australian small business owners are borrowing more to protect cash flow rather than to expand, but the sector's capacity to adapt should not be underestimated.
Recent Equifax data shows Australian business loan demand jumped 11.3% year on year in August, but the vibe was well and truly defensive.
Asset finance applications dropped 12.7% while lines of credit shot up – evidence that SMEs are moving to shore up liquidity rather than grow their business.
For Calvin Cordle (pictured), managing director of self-employed specialist lender RedZed, the figures paint a picture of adaptation rather than distress.
"While small business owners and self-employed borrowers may feel the impact of economic headwinds differently to salaried borrowers, they also tend to be highly resilient,” Cordle said in a new interview with MPA. “Many have the flexibility to adjust their workload, pursue new revenue opportunities or manage expenses more closely as conditions change.”
The pattern has been building for months. The average SME loan size fell 20% in the June quarter, according to Banjo Loans, with lenders describing businesses borrowing to cover wages, suppliers and day-to-day costs.
"SMEs are doing it tough right now,” Banjo Loans chief executive Guy Callaghan said in July. “We're seeing more businesses come to us not to fund growth, but simply to keep the lights on – covering wages, paying suppliers and managing day-to-day cashflow.”
But in Cordle’s experience, self-employed Australians are some of the most resourceful and adaptable people in the workforce, “and they've consistently demonstrated an ability to navigate economic uncertainty and changing market conditions”.
And while the ongoing economic challenges and cost-of-living pressures affecting many Australians should not be trivialised, there are bright spots to the economy too: “employment levels have remained relatively strong, providing an important foundation for the broader economy.”
Small business debt climbs for liquidity, not expansion
Alongside a defensive shift in SMEs’ borrowing appetites, the Equifax Business Market Pulse survey showed average applicant credit scores slipped two to three points, and active Australian Taxation Office (ATO) tax defaults reached 36,900 nationally, up 22.6%.
Pressure has come from several directions. The Reserve Bank of Australia (RBA) lifted the cash rate three times this year, and the market expects a further 25-basis-point increase at the RBA's meeting next Tuesday.
Payday Super, which took effect on 1 July, requires employers to pay superannuation with each pay cycle rather than quarterly, removing a short-term cash buffer many small businesses relied on.
"Many self-employed Australians continue to face cost pressures driven by both local and global factors. While inflation remains a challenge, there's always light at the end of the tunnel," Cordle said.
"Economic conditions move in cycles, and we expect higher interest rates to work their way through the economy over time, which should help ease inflationary pressures. In the meantime, small business owners are focused on managing cash flow, controlling costs and adapting to changing conditions as best they can."
Why proactive broker outreach matters now
With business and household finances closely intertwined (consider the fact that SME owners carry mortgage debt around 50% higher than non-SME owners nationally) Cordle said brokers who reach out early can make a material difference.
"Proactive broker outreach is valuable for all borrowers at any time, but particularly for the self-employed, whose circumstances can be more complex. At RedZed, we invest time and effort into supporting brokers with the insights, guidance and flexibility they need to help clients navigate changing market conditions. In times of economic uncertainty, this support can be critical in helping borrowers better understand their options and make informed decisions with confidence."
Market conditions are also reshaping what lenders offer.
Non-bank lenders became the main providers of residential SMSF loans after the major banks’ mass withdrawal in the late-2010s.
Unfortunately, that left them most exposed when the federal government's ban on new residential SMSF lending took effect in August. Cordle told MPA in June that the decision had come as a surprise, saying at the time: "If we reflect on last year, when the question was put to the government, their response was that they would not intervene in SMSFs.”
Now, with new residential SMSF business winding down, RedZed has turned to its existing book. It has launched a streamlined refinance process for borrowers already holding residential SMSF loans. SMSF borrowing for commercial property is still permitted, and Cordle expects investor interest in that segment to continue.
Demand for commercial property (fuelled by a boom in foreign investment) is rising more broadly, Cordle noted – which has led RedZed to cut pricing on its commercial lending products, even as borrowing costs head the other way.
The market is broadly anticipating another 25-basis-point increase at the RBA's meeting next Tuesday, and with cost-of-living pressures and higher rates still weighing on borrowers, competitive pricing and flexible lending options will remain a priority.
“Brokers and borrowers are looking for clarity around what's possible in a changing market,” Cordle said. “That's where a commonsense approach to lending is particularly important. At RedZed, we focus on understanding each borrower's individual circumstances and working with brokers to find practical solutions that help self-employed Australians achieve their goals.”
