- Small businesses have been hit hardest by the pandemic
- Small businesses have faced challenges accessing finance
- The RBA and Federal Government have implemented a range of policies to support SMEs
Small businesses have been hit hardest by the pandemic and found it a challenge to access finance.
This was the key theme of the Assistant Governor of Financial Financial Markets at the Reserve Bank of Australia (RBA), Christopher Kent’s latest address to the Australian Finance Industry Association.
Although economic conditions are improving across Australia, small businesses are around twice as likely as large businesses to report declines of 50% or more, according to the RBA’s latest data.
This is reflected in the fact that most small businesses operate in cafes, restaurants, arts, and recreation – industries most severely affected by COVID-19 restrictions.
The RBA’s main concern is that small businesses have struggled to access finance for years even prior to the pandemic.
Lenders generally reject a greater proportion of loan applications from smaller businesses, as they are seen as riskier than larger firms with established profitability.
Small businesses also have fewer alternatives for external finance. For example, it is often too costly for them to raise funds directly from capital markets.
The RBA has implemented a range of policies to help the difficulties small businesses face in accessing finance.
Ultra-low interest rates have reduced the costs of borrowing to historically low levels to support the supply of credit to businesses and strengthen household balance sheets.
The Term Funding Facility (TFF) provided low-cost term funding to banks, which provides incentives for banks to increase their funding to small-to-medium enterprises (SMEs). For every dollar of extra lending to SMEs, a bank is allocated a further 5 dollars of low-cost funds from the TFF.
The graph below shows a range of banks have responded to the TFF incentive, benefitting small businesses.
On the fiscal side of things, the Government provided a wide range of measures to support cash flows, such as JobKeeper, Boosting Cash Flow for Employers, and provided tax incentives to reduce costs for businesses.
This has increased household income and boosted aggregate demand in the broader economy.
Recent data from NAB also show a positive picture for businesses. Business confidence by industry continued to climb this past month, reaching its highest level since 2010.
With RBA Governor, Philip Lowe committed to boosting employment as a primary goal of monetary policy, interest rates are to remain low for years to come.
This means small businesses can expect borrowing costs to remain at unprecedently low levels. With the range of incentives to support them, it is expected a full recovery is well underway as COVID restrictions are eased around Australia.
And as the economy continues to recover (boosted by artificially low-interest rates), this feeds into a booming property market.