Downturn a bigger threat than inflation
With fears of a possible recession looming, research from Small Business Loans Australia paints a gloomy picture for SMEs, with around a third predicting their business would close within six months.
A recession, defined as two consecutive quarters of negative growth, has yet to hit Australia’s shores. Inflationary pressures are building and the RBA has lifted the cash rate three times in a bid to balance supply and demand, as it continues to unwind monetary stimulus.
Some quarters of GDP may turn negative without a major impact, so a recession would depend on how much and how long, NAB said, noting unemployment would need to rise at least back into the mid-4% range.
To understand how businesses might cope in a recession, financial comparison website Small Business Loans Australia commissioned a survey of 253 SME owners in July, asking them to forecast how their business would cope if consumers were to cut back their spending.
Findings showed 34% of SME owners expected their businesses to survive less than six months, and 14% said their business was unable to survive a recession at all.
Over a third (39%) said they could survive for 18 to 24 months, and just over a quarter (27%) said they could survive between six and 12 months, results showed.
Read more: What’s happening to Australian business confidence?
Of businesses who said they could not survive a recession at all, the highest portion of responses was recorded in Western Australia (38%), followed by South Australia (17%). Of those able to survive less than six months, the highest portion (27%) were in Queensland, followed by SA and NSW (each 20%).
Higher interest rates put banks and businesses at risk of defaulting on loan payments, while inflationary increases, if left unabated, reduced consumer confidence and spending, Small Business Loans Australia said.
Businesses were torn over whether a recession or rising inflation would be more damaging. Across all businesses, slightly more (55%) believed a recession would pose a greater challenge, indicating both factors would have negative impacts on businesses, results showed.
Small businesses with between 11 and 50 staff would feel the effects of a recession the most, with 63% believing an economic downturn would be worse for their business.
Small Business Loans Australia founder and managing director Alon Rajic (pictured) said the results followed a tough two years for Australian businesses. Many had grappled with decreased margins and cashflow due to operational limitations, lockdowns and lower consumer confidence, he said.
In the event of a recession, he said results showed many SMEs would not have a savings cushion or a “plan b”.
“The sector is extremely resilient, and my hope is that businesses have learnt from the pandemic to have some safeguards prepared to see the other side of this period,” Rajic said.
Over a third (36%) of micro businesses (1-10 employees) and just under one third (31%) of medium-sized businesses (51-200 employees) said they couldn’t survive more than six months of a recession, results showed.
Of small businesses (11-50 employees), just over a quarter (26%) said they couldn’t survive more than six months.
“Recessions can affect businesses of all sizes, however, typically larger companies can have an extra financial buffer to fall back on, as it is normally easier for them to secure financing. It is concerning to see established businesses have a gloomy outlook on their ability to survive a recession,” Rajic said.
To minimise the impacts of a potential recession, he encouraged SMEs to implement preventative financial practices, such as renegotiating vendor agreements and cutting unnecessary costs.
“If SMEs are paying off business loans and have been affected by increased rate rises, consider consolidating debts and refinancing loans to secure a lower rate. Comparison services make good online research tools and can help SMEs find an appropriate loan that will allow them to fix lower interest rates,” Rajic said.
Read more: Unemployment fall keeps pressure on interest rates
As SMEs are considered the backbone of the Australian economy, Rajic said it was concerning that many continued to face external factors, including a recession, that threatened their ongoing survival.
“Ultimately, economic downturn is predicted but not guaranteed and targeted government stimulus and investment in population and export growth could pull our SME market safely through this period of uncertainty,” Rajic said.
“Businesses who proactively make changes and put practices and safeguards in place will also be able to survive and thrive beyond this tough period.”
