Credit and capital constraints harm Australian SMBs

Credit and capital constraints harm Australian SMBs

New PricewaterhouseCoopers business barometer highlights the credit crunch over the past year

Australian SMBs are being constrained by credit and capital shortages, according to a new survey from PricewaterhouseCoopers.

In its sixth bi-annual Private Business Sector Barometer for October 2009, 80 per cent of organisations reported credit was an impediment to meeting growth targets over the next year, up 30 per cent year-on-year. Of those surveyed, more than 60 per cent had their debt facility reviewed by financial providers in the past six months.

Additionally, eight in 10 businesses claimed capital constraints were preventing them from expanding their businesses. Of these, 39 per cent cited debt as the main difficulty faced when trying to raise capital. One out of every two businesses also reported stricter debt contract covenants, while 29.3 per cent said their lender had demanded additional security to cover existing debt.

“Nearly half [43.2 per cent] of businesses that fell short nominated lack of funding on acceptable terms as the reason. This is deeply concerning to the private business community, as funds-starved businesses struggle to make the investments needed to grow strongly,” the report stated. “This triggers a negative spiral as financiers are typically reluctant to provide funds to stagnant businesses. Breaking out of this cycle is difficult and dependent on businesses having a clear strategy and strong relationships with their financiers.”

Only one in five organisations claimed to be preparing for the upturn, indicating many were still focused on short-term performance, PricewaterhouseCoopers said. This was also reflected in the number of organisations that ranked price as a key driver of competition (30.4 per cent).

“Eight in 10 businesses are stuck in the status quo,” PricewaterhouseCoopers manager, Greg Will, told ARN. Alarmingly, the majority of businesses surveyed had only completed business plans because banks requested them to do so.

“Banks want to understand the business from a risk management point of view, but it’s not the right motivation to do a business plan,” he said. “When we looked back at the last downturn, which was 1991/1992, the better businesses were the ones that planned for the upturn. It could take six months when that trigger hits to comeback to normalcy.

“Those businesses that can be ahead now, will be ahead when there’s an upturn.”

Distributors and industry groups have highlighted access to credit as a major issue in the IT channel over the past year, as insurers and providers felt the pinch of the global financial crisis. Back in April, key credit provider, CoFace, announced it had cut select customers across high-risk industries including IT, by 30 per cent.

“In talking to clients, that availability of funding is a major concern – private equity has been pulled out, offshore providers have pulled out, and the financiers have either left the market or are nervous about anything that’s out of the box,” Will said. “Organisations are either trying to go through the banks, trying for more shareholder funding, or are working their working capital.

“I don’t think it’s going to change in the next six months – from a funding point of view, there is a lot of pressure on the banks and in general, to get access to capital and credit, but people are still gun shy. I don’t think things will pick up unless providers open up.”

Despite the more challenging conditions, private businesses saw an overall 6.8 per cent increase in sales year-on-year, along with a 5.8 per cent rise in profits. A significant portion of private businesses were also confident their three-year profits would rise by up to 14.2 per cent, the highest rate reported since the launch of the barometer in 2007.

On a state-by-state basis, PricewaterhouseCoopers found businesses in WA and Queensland continued to outperform their NSW and Victorian counterparts with profit growth of 12.8 and 12.7 per cent, respectively. This however, was down from 20 per cent in the previous year. Nationally, businesses were also growing at a slower pace, the report claimed.

The barometer is based on a survey of 758 businesses across Australia bringing in $10m- $100m in annual revenue. The survey was conducted in August-September 2009.

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