Small business interest rates hit 20-year low, but there’s more to the SME finance story

The Australian Bankers’ Association (ABA) says small businesses are benefiting from record-low low interest rates on business loans, but when it comes to finance, smaller operators are worried about more than just the amount they’ll repay once they secure a loan.

The ABA says data from the Reserve Bank of Australia reveals that over the past six years interest rates for small businesses have fallen to the lowest levels since data started to be collected on the amount SMEs pay for finance.

In 2011, the average small business loan incurred an 8.4% interest rate, compared to 5.3% now. This amounts to $9 billion less being paid in interest compared with seven years ago, according to the data.

However, the small business community has been concerned over the past year not only with the terms of loans once they are acquired, but with actually gaining access to finance in the first place.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell told SmartCompany last year that as the big banks continue to favour loan applicants with equity in physical property, business owners who have been unable to break into the property market are facing big challenges.

In November, she said this situation was also leading to equity issues, because “the children of affluent parents have greater opportunities to buy and grow businesses” while those without substantial asset bases struggled for finance.

For some of Australia’s largest banks, standard variable rates for business loans that are not secured by residential property are still advertised as higher than those secured by residential property.

For example, the Commonwealth Bank advertises standard variable rates starting at 5.73% for business loans secured by residential property, compared with 7.81% without property.

NAB lists a starting rate of 5.19% for its Business Options Prime package, but this is also for loans secured by residential property only. Westpac’s variable base rate for small business loans is 5.32%.

SmartCompany contacted the Commonwealth Bank, NAB, Westpac and ANZ for details of their small business loan offers.

A spokesperson for NAB told SmartCompany the bank considers a range of factors when setting interest rates.

“Our customers are also telling us that while competitive pricing is important, so is fast, simple and digital access to credit. Time poor small businesses want quick and easy access to unsecured credit, which is why we’ve developed unsecured lending options such as QuickBiz,” the spokesperson said.

Loan terms and models challenged

The ABA’s chief economist Tony Pearson told SmartCompany lower rates for small businesses can help “drive economic growth, create new jobs and tackle unemployment”.

Small business figures agree finance is critical to propelling a business forward, but over the past year the focus of those in the landscape has been ensuring businesses get the best possible deal once they access finance.

In August, the big four banks signed off on changes to contract terms for small business loans after Carnell’s lending enquiry uncovered practices like unfair variation of loan terms, which were hurting SMEs.

The ABA has also committed to simplifying language in contracts and rewriting the small business section in its revised Code of Practice, which it lodged with the Australian Securities and Investments Commission in December.

However, concerns over access to finance continue to prompt suggestions that Australia should change its approach to small business loans.

One of the key recommendations in a pre-budget submission from the Institute of Public Accountants (IPA) calls on the government to consider a state-backed loan guarantee scheme to help SMEs get ahead.

The IPA says this approach could give banks incentives to lend to smaller operators who may otherwise struggle to successfully apply for loans.

“There is a strong case for designing and implementing a loan guarantee program in Australia to help remedy the specific problems of smaller and younger start-ups unable to finance new investment opportunities through normal commercial channels,” IPA chief executive Andrew Conway says in the submission.

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