Business borrowing on the rise, but small businesses set for a struggle

Business borrowing levels have reached their highest since the global financial crisis, but businesses in a range of industries including retail, manufacturing, mining, telecommunications and media will still face higher interest rates, according to a new report.

The report, to be released in April, forms the latest instalment from a series of insights from Macquarie and East and Partners – and it shows small businesses continue to face increasing pressure from interest rates.

East and Partners head of market analysis Lachlan Colquhoun told SmartCompany business borrowing rates are set to reach their highest point since April 2008, as the economy continues to strengthen.

“Business borrowings are going to pick up for the first time in the second half of this year. Our research indicates the market is reasonably bullish,” he says.

“Businesses now need working capital to fund expansions and this is the reason they’re going to borrow. Some businesses have been holding on for far too long and not investing back into their businesses and they need to borrow in order to make this investment,” he says.

However, Colquhoun says a further distinction exists between small businesses and large corporations in terms of borrowing.

“The smaller businesses get hit from just about everywhere in terms of fees, interest rates and approvals. We asked them about signs of stress in the survey and they display much greater levels of stress than big businesses.”

“Most of the small businesses are still in the deleverage phase, with the majority tied to the family home. The Mum and Dad businesses are the backbone of the economy and they are still very cautious,” he says.

Colquhoun says the pressure on small businesses is unlikely to ease later this year.

“I think the pressure on small businesses will be glacial. I guess what we see at the moment is what we call ‘green shoots’.  We’re seeing them across the economy, but particularly at the upper echelons of the market,” he says.

The predicted increase in borrowing is welcome news, since the previous East and Partners banking series report released in September 2012 found “planned businesses investment is likely to dry up leading to lower business loans in the near term”.

The most recent research suggests loan growth will continue to be strongest in Queensland and Western Australia, in accordance with the findings from the September report.

But while borrowing is expected to increase, so will interest rates for businesses in sectors deemed ‘risky’ by the banks.

These businesses, such as those in the mining sector, will have their interest rates “re-priced”.

The report found approximately 10% of miners say their loans had been re-priced, compared with an average of 6% across all sectors.

Colquhoun says banks conduct careful research to determine a business’s risk factor.

“They [the banks] always run a risk analysis of a business and the interest rates are adjusted to reflect this. Our figures indicate those sectors [mining, retail, telecommunications, media and manufacturing] will continue to be flat,” he says.

Colquhoun says the research also revealed the economy will continue at “two speeds”.

“It’s still a huge two-speed economy between the mining and financial services companies at the upper end of the market and the retail and manufacturing companies,” he says.