Victorian firms cutting debt faster than other SMEs: Report

Victorian SMEs are borrowing less and reducing their debt more than SMEs in any other state, according to a new survey from accounting firm WHK, as businesses feel the effects of Australia’s two-speed economy.

The survey of 540 SMEs, which covers the June quarter, found 58.7% of SMEs are seeking to maintain or reduce their debt levels, reversing the trend of the previous three quarters.

Victorian SMEs appear to be struggling the most, with 18% seeking to reduce their debt, compared to 5.6% for the rest of the country.

Carl Walsh, chief executive of WHK Melbourne, says there is a certain amount of conservatism among Victorian SMEs given the state of the economy.

“There is no mining sector in Victoria and three of the state’s biggest industries – retail, exporting and manufacturing – are all suffering,” he says.

Meanwhile, the report reveals more than half of SMEs have inserted private funds into their business in order to survive in the past 12 months.

Walsh says business confidence continues to falter, claiming SMEs are looking to survive rather than grow.

“This is occurring during a period where SMEs have expressed concern that they are not on the Federal Government’s agenda, that the minority government will be ineffective at managing the economy, and that they have been treated poorly by the banks,” Walsh says.

“On top of this, SMEs are growing increasingly wary of the strong Australian dollar, at the same time Australians are saving at an increased rate and spending less, creating a dangerous operating environment for SMEs.”

The report reveals that 42% of SMEs believe the Australian dollar is negative for their business, compared to 27% in November 2010. Only 15% see the dollar as positive, down from 33% in November last year.

Meanwhile, lending institutions are demanding that SMEs put up their residential home or other personal assets as business lending security.

The report reveals that over the past year, 62.5% of SMEs have been required to provide their private residence or personal assets as security for their business loan.

“As the rates on loans were increased for SMEs, so to were the conditions of credit, and this has increasingly included the requirement for more security in the form of the family home or other personal assets,” Walsh says.

“These conditions create a clear path for banks to capture the business owners themselves as private banking customers; a segment that is profitable and stable for banking institutions.”

“SME businesses increasingly realise that their private home is the key to funding their business growth, whether as a start-up or looking for cashflow to grow,” Walsh says.

As a result of this requirement, business and private banking for SME owners are becoming increasingly connected, with 57% of SMEs now privately banking with the same institution they utilise for their business.

“This is a great result for banks, who are capturing increased cross-sell on a segment that has already experienced increased costs on their business loan facilities, however not a good result for SMEs who are looking for greater choice and competition,” Walsh says.

Walsh says start-ups looking to access credit need to understand the credit process, particularly what is required to fill out a “decent” application.

“They should be prepared to put up their personal residence as business lending security and show strong cashflow, which is very hard when you’re starting up,” he says.