Small business credit demand dips in 2010

Small business demand for credit fell away significantly last year, with caution set to continue in 2011, according to new research.

The latest Business Credit Demand Index by credit information specialists Vega Advantage found that credit demand fell by 7.3% in the December quarter compared with the 2009 figure.

Across the year, business credit was down by 4.2% from 2009.

Asset finance recorded the largest year-on-year decline of all business finance in the quarter, down 26.4%. Trade credit was down 2.4% while business loans remained flat at -0.7% year-on-year.

All states and territories experienced a decline in credit over the quarter, with the largest falls in Tasmania and Queensland at -10.3% and -10.2% respectively.

WA reported a decline of -8.7% followed by Victoria at -6.3%, NSW at -6%, the ACT at -4.3% and South Australia at -2.1%.

Hamish Osborn, head of commercial risk at Veda Advantage, says businesses focused on cost containment rather than expensive business initiatives in 2010.

“Small and medium businesses need to maintain stringent credit risk management in 2011 as the economy slowly recovers. All SMEs should be checking business credit risk before taking on a new client or partner,” he says.

“Businesses should also monitor existing relationships to reduce the possibility of being exposed to bad debt, which could be lethal in the current business climate.”

“Our recommendation is to look for opportunities to do business with good customers. Understand your customer as best you can and seek to provide as much transparency as possible,” he says.

“It’s particularly pertinent in the SME space – if a single customer fails to pay, it can be very damaging for the business.”

In 2011, Osborn says Australian businesses and credit providers are facing significant legislative changes and new compliance obligations, which may have further impacts on credit processes.

“New responsible lending legislation, anti-money laundering compliance and the new personal properties securities register… require businesses to review the way they provide credit to business and consumers,” Osborn says.

“Businesses need to be stringent about their credit approvals process to maximise cash flow, minimise bad debt and – in the case of the personal property security register – secure the credit provided.”

Osborn is confident the business credit demand index will rise as consumer confidence starts to increase, stating: “I’d like to encourage people to be positive – Australia is a great market to be in.”