Demand for business credit falls as companies hold off on growth plans

New figures from financial information research firm Veda Advantage reveal demand for business credit fell 5.7% in the September quarter, with businesses continuing to focus on cost cutting and organic growth rather than aggressive expansion.

According to the data, business demand for credit dropped 2.1% in July, 10.2% in August and 2.4% in September, compared with the previous year. This followed a 5.6% fall in the June quarter.

Most pronounced was a drop in the demand for asset finance, which has fallen 10.7% in the first nine months of the year.

Hamish Osborn, head of commercial risk at Veda Advantage, says the sharp fall could be related to particularly high spending during the 2009 year, when the Government’s special tax break for investment pulled a lot of spending on assets forward.

However, he says the general drop in demand for credit, suggest the GFC has forced many SMEs to learn to do more with less.

“Companies are working with what they have, the customers they have and product suite they have and they are only pursuing growth strategies that do not need large amounts of capital,” Osborn says.

“The market has clearly been tight for some time, but we think it has caused a new level of credit risk management to be put in place. “It’s not just the banks – customers are becoming more careful about asking for credit.”

Osborn says that while larger, well-performed companies are able to get credit and even drive relatively good deals with the banks, smaller companies and start-ups appear to have stopped trying to get credit.

“There is not a lot of brand new stuff coming out there. New organisations just aren’t making the applications.”

Osborn says it is simply too early to predict whether demand will rebound in 2011 as the Australian economy continues to gather pace.

While credit demand would typically rise with economic growth, Osborn says the lack of demand for asset finance suggests companies are not investing in assets now means they may be poorly placed to chase growth opportunities in the New Year.

“Australian businesses have been accused in the past of not investing enough in their assets and we might be seeing another mini cycle like that.”

All states recorded a decline in credit demand year-on-year with the steepest decline in South Australia (-8%) followed by Queensland (-7.2%), NSW (-6.5%), Western Australia (-5.4%) and Tasmania (-2.3%). The ACT and Northern Territory were relatively flat, falling 1.5% and 1.6% respectively.