Will SMEs seek to borrow in 2021 & will banks be prepared to lend? And what role should government play?

Will SMEs seek to borrow in 2021 & will banks be prepared to lend? And what role should government play?

According to the RBA, lending to SMEs remains flat and demand by SMEs for credit is subdued.This is despite record low interest rates which the RBA says it won’t be looking to increase until 2024.


So why aren’t more small businesses taking advantage of these rates? Will banks increase their lending. And what role can and should government play to get banks lending and SMEs borrowing?

Here’s three reasons why SMEs have not been borrowing:

1. They’re still nervous about the future. Businesses especially those most affected by on-going shutdowns and border closures like tourism and hospitality, remain understandably reluctant to take on more debt.

2. They are cashed up and don’t need the funds. Many have been able to build a liquidity buffer by taking advantage of JobKeeper, loan payment deferral initiatives and drawing down on credit limits. A recent ABS survey revealed that 35 per cent of small businesses reported that they had enough cash for at least six months.

3. They would like to borrow but getting an approval has been difficult. Covid-19 caused banks to be extra cautious about lending to particular sectors as well as to customers from other banks.

Uncertainty about “responsible lending” during a global health pandemic placed further pressure on banks already subject to close political and public scrutiny. Assessing a borrower’s ability to service and repay debt can be a challenge at the best of times but when income drops or stops altogether it becomes problematic.

These changed circumstances led to blow outs in decision making turnaround times.

Surveys of small business indicate that access to finance became less difficult in the latter months of 2020. At the same time, fewer business reported that they have tried to access finance which suggests many have given up or simply don’t even bother to look.

It seems the old adage of “the companies the banks want to lend to don’t want to borrow and the ones that want to borrow, the banks won’t lend to” has largely held true.


2021 should be better. NAB Monthly Business Surveys point to a rapid rebound in the economy as restrictions ease and state borders open up. NAB expects continued improvement in both confidence and conditions which are now above average, and stronger than the period right before the pandemic.

If you can get debt, it will be at the lowest rates in decades plus these rates are likely to be with us for at least the next three years.

If you have been knocked back or have not even tried, now might be a good time to re-assess. Banks do want to lend to the SME sector which provides solid returns and a spread of risk.

Viable small businesses unable to access debt would also benefit from exploring funding options outside the big four banks including second tier banks, non-bank lenders, grants and programs like the Australian Business Growth Fund.

Specialist SME lender Judo Bank which talks about an “SME lending funding gap of $90b” doubled its loan book in the last year, albeit off a very low base.

Similarly, Prospa, the listed specialist SME fintech lender, increased loan originations in the last half year by 37 per cent again of a relatively low base.

Prospa and several other fintech lenders such as GetCapital and Moula now offer a range of products, longer terms and as they develop more of a track record, they have been able to reduce their cost of funds and therefore offer more competitive pricing. And this week global finance giant Amex announced it will soon enter this market.

These lenders are especially well suited to business owners who do not have or are not able to offer property as security and/or need a prompt decision and access to funds.


Prior to Covid-19 the Government, chastened by the findings of the Haynes Royal Commission, was at loggerheads with the banks. Since then they have buddied up in order to avoid an economic calamity.
The $200b Term Funding Facility which gives banks access to funds at 0.10 per cent is a free kick that has not been awarded to non-banks. Whilst banks have taken advantage of the TFF, most of this has been to fund residential mortgages rather than small business loans.

$40b Coronavirus SME Guarantee Scheme sees taxpayers share 50 per cent of the risk of loans made to SMEs. To date only $3b has been drawn under this scheme with 80 per cent attributed to the two biggest SME lenders being NAB and CBA.
These programs combined with the $billions of even lower cost deposits from business and personal customers mean the banks have plenty of cheap money to lend.

But governments cannot force banks to lend. They can and should however ensure that genuine competition exists and more needs to be done on this front.

Likewise, governments cannot force SMEs to borrow but they can and should implement policies which give them the confidence to do so.

Recently Kate Carnell, the Small Business & Family Enterprise Ombudsman, called for a government funded loan scheme where repayments are based on turnover and the interest rate is capped at a percentage of the small business’ annual revenue. The scheme would work like HECS loans and allow businesses to access credit without having to pay it back until turnover had reached a designated level. This is worth considering although any program involving government lending taxpayers’ money is fraught and would be challenging to implement and administer.

In the absence of significant Covid-19 breakouts and with the roll out of vaccines in the next few months, we can expect to see small businesses more willing to borrow and lenders more prepared to accommodate this demand.


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