Speech
Small Businesses Finance in the Pandemic
[*]
Christopher Kent
Assistant Governor (Financial Markets)
Address to the Australian Finance Industry Association
Sydney - 17 March 2021
Thank you for the opportunity to discuss small business finance with you today.
Small businesses play a critical role in the Australian economy. They employ nearly 5 million Australians.
They account for about one-third of private (non-financial) output, and they are a key source of
innovation and competition. Many small businesses use external finance from banks and other sources
to manage their cash flows, invest in new equipment and expand their operations.
The Reserve Bank has been paying close attention to small businesses' access to finance for many
years. Every year for almost 3 decades we have convened a panel of small businesses to better
[1]
understand the issues they face. We also speak with businesses, banks and other financiers through
[2]
our various liaison programs. A consistent and ongoing theme is that smaller businesses find it a
challenge to access finance.
Today I'll discuss how smaller businesses have been affected by the economic downturn over the past
[3]
year, with a focus on their access to finance. I'll also outline the measures that were introduced to
help mitigate the additional financing difficulties that small businesses faced as a result of the pandemic.
Smaller Businesses have been Heavily Affected by the
Pandemic
While economic conditions are improving, it has been a particularly tough year for small businesses. The
pandemic caused the largest economic downturn in Australia since the 1930s. Businesses in all
industries and of all sizes have been significantly affected, although the experience has been quite
uneven.
In particular, small businesses have generally been hit harder than larger businesses. Many businesses
surveyed by the ABS reported that revenue in June of last year was much lower than the year prior.
But, small businesses were around twice as likely as large businesses to have reported declines of
50 per cent or more. This difference was also apparent in retail sales data (Graph 1). Much of the
difference between small and large businesses reflects the fact that many small businesses operate in
industries such as cafes, restaurants, arts and recreation that were most affected by COVID-19
restrictions.
Graph 1
Retail Sales Growth by Firm Size
Year-to-latest three months, current prices
% %
10 10
Large firms
0 0
Small firms
-10 -10
-20 -20
2009 2013 2017 2021
Sources: ABS; RBA
When it comes to finance, the past year has actually been less volatile for small businesses in general.
Aggregate lending to SMEs has been little changed since the onset of the pandemic (Graph 2). Indeed,
SME lending has been around its current level for the past few years. Aside from lending to the
agricultural sector, which increased throughout much of 2020, lending has been flat for SMEs across the
board (Graph 3). But lending to SMEs in those industries most adversely affected by the pandemic has
been low for some time. In contrast to SMEs, lending to large businesses increased sharply in March
and April last year, as those businesses drew upon sizeable lines of credit. Large businesses have since
repaid these funds, though outstanding lending remains a bit above pre-pandemic levels.
Graph 2
Lending to Business*
$b $b
Large business
400 400
Medium business
200 200
Small business
0 0
J A S O N D J F M A M J J A S O N D J F
2019 2020 2021
*
Data cover financial institutions with $2 billion or more in business credit
Sources: APRA; RBA
Graph 3
Lending to Selected Industries
Small and medium-sized businesses, credit outstanding
$b $b
Highly affected by COVID-19* Less affected by COVID-19*
Rental
80 80
Agriculture
Other highly
affected**
Other services***
40 40
Accom & food
Construction
Healthcare
Admin
0 0
S D M J S D M S D M J S D M
2019 2020 2021 2019 2020 2021
*
Highly affected industries had the highest share of businesses report
a fall in revenue of greater than 50 per cent in a June 2020 ABS
survey; less affected industries are the top four by value of SME lending
**
Education & training; arts & recreation; information media & telecoms
***
Other services includes a broad range of personal services, selected
repair and maintenance activities and private households employing
staff
Sources: APRA; RBA
There has been little change in total SME lending over the past 12 months for several reasons. In part,
it reflects the reluctance of some businesses to take on more debt in a weaker and more uncertain
economic environment. At the same time, many businesses, including smaller ones, have been able to
make use of government and private-sector measures designed to support business cash flows. This
reduced the need for many businesses to access external finance, which is more expensive than a
business's own internal funds.
Another factor weighing on lending is a more cautious approach by banks in deciding whether to finance
small businesses. Much of this has reflected the application of pre-existing lending standards in a
weaker economic environment. But lending standards have also been tightened. For example, banks
have required a greater degree of verification of borrowers' information, and banks have been more
cautious about lending to new business customers and to the sectors hit hardest by the pandemic.
Small Businesses have Reported Difficulties Accessing
Finance for Years
Many of the challenges small businesses face when accessing finance have been around for many years.
Although I am focusing on the experience in Australia, it is worth noting that these challenges are not
[4]
unique to SMEs in Australia.
Small businesses, particularly less established ones, tend to be riskier than large, established firms with
a track record of profitability. As a result, lenders reject a greater proportion of loan applications from
smaller businesses. They also charge more to take on the additional risk associated with the loans that
they provide. The terms for the loans may also be more restrictive. For instance, loans to small
businesses may often be small relative to the size of the business, or require collateral or personal
guarantees. Indeed, around 95 per cent of loans to SMEs are secured - compared with around
70 per cent for large business loans (Graph 4). And about half of small business loans are secured by
residential property. Many small business owners may not be well placed to provide sufficient home
equity to secure a suitable loan.
Graph 4
Lending to Businesses
Not seasonally adjusted, break-adjusted
$b $b
Small business Medium business Large business
600 600
450 450
300 300
150 150
0 0
S D M J S D M S D M J S D M S D M J S D M
2019 2020 2021 2019 2020 2021 2019 2020 2021
Secured (other) Unsecured
Secured (residential property) Secured
Sources: APRA; RBA
Small businesses generally have few viable alternatives for external finance outside of traditional
intermediated finance. Unlike large businesses, it is too costly for them to raise funds directly from
capital markets. Australian small businesses have made increasing use of non-traditional sources of
[5]
finance in recent years, such as balance sheet lending and marketplace lending (Graph 5). However,
the available data suggest that non-traditional sources of finance accounted for less than 2 per cent of
overall SME lending in 2018.
Graph 5
Non-Traditional Finance
Transaction volume
A$m A$m
Total
1,500 1,500
Other*
1,250 1,250
Marketplace
consumer lending
1,000 1,000
750 750
Balance sheet
business lending
500 500
250 250
0 0
2013 2014 2015 2016 2017 2018
*
Includes balance sheet consumer lending, marketplace business
lending, property lending, invoice trading, crowdfunding, and other
models
Sources: Cambridge Centre for Alternative Finance; RBA
Programs to Mitigate Financing Problems for SMEs during
the Pandemic
It was expected that the difficulties smaller businesses face in accessing finance would worsen during
the pandemic. So a range of policies were put in place to support the provision of low cost finance to
small businesses.
The Reserve Bank introduced a package of monetary policy measures at the onset of the pandemic.
These have helped to reduce the costs of finance to historically low levels, and have been supporting
the supply of credit to businesses and strengthening household and business balance sheets. The Term
Funding Facility (TFF) provides low cost term funding to banks. It includes incentives for banks to
increase their lending to non-financial businesses, especially SMEs; for every dollar of extra lending to
SMEs, a bank is allocated a further 5 dollars of low cost funds from the TFF. A range of banks have
expanded their lending to SMEs and benefited from these additional allowances under the TFF
(Graph 6).
Graph 6
TFF Allowances
$b $b
150 150
100 100
50 50
0 0
A M J J A S O N D J F M
2020 2021
Initial* Additional (SMEs)
Additional (large business) Supplementary
*
Represents final usage from October 2020 onwards, as the drawdown
period for the initial allowance closed on 30 September 2020
Sources: APRA; RBA
The Government also introduced a range of significant measures to support business cash flows and
balance sheets. Policies such as JobKeeper, Boosting Cash Flow for Employers and enhanced tax
incentives for investment have reduced costs for businesses, increased household disposable income
and supported aggregate demand more broadly. They have preserved employment relationships
between firms and employees, and have helped otherwise viable businesses stay afloat when their
revenues were markedly reduced by COVID-19 restrictions. These measures reduced the need for many
businesses to borrow. This accords with ABS surveys conducted in both October last year and February
this year, in which most businesses indicated that they had sufficient funds and did not need additional
finance. Similarly, late last year, non-financial companies had built up cash buffers that could cover
nearly 6 months' worth of expenses, an increase of around 30 per cent compared with before the
pandemic. Unincorporated businesses had increased their cash buffers by 20 per cent to a little over
2 months' worth.
Other measures associated with the pandemic have been introduced to support the supply of credit.
This includes the Australian Government's $15 billion Structured Support Fund to help smaller lenders
access funding and a $40 billion SME loan guarantee scheme to enable participating lenders to issue
cheaper loans to small businesses. The loan guarantee scheme has just been enhanced for SMEs that
have been receiving JobKeeper. Those SMEs can borrow up to $5 million for up to 10 years (up from
$1 million and 5 years previously). The funds can now also be used for refinancing of some existing
loans. In addition, the Government is guaranteeing 80 per cent of each loan under the expanded
scheme (up from 50 per cent).
Support has also been provided by the private sector. Landlords allowed for more flexible rent
arrangements and banks offered to defer loan payments.
Along with the country's successes on the health front, these policies have lessened the economic
impact of the pandemic and underpinned the economic recovery that is now well underway.
The effects of this have started to flow through to small businesses. Measures of small business
confidence have increased over the past 6 months. In February, a smaller share of businesses indicated
that economic uncertainty was weighing on their investment plans than was the case in August last
year. Labour market outcomes have also improved. The increases in job openings and employment
growth observed since late last year have been particularly pronounced in industries that were most
affected by COVID-19 restrictions. Again, these are the industries that are heavily populated with
smaller businesses.
Finally, a number of ongoing government initiatives will continue to support small businesses after the
temporary measures associated with the pandemic are phased out. These were developed prior to the
pandemic in response to long-running concerns about access to finance by SMEs.
One such initiative is the $2 billion Australian Business Securitisation Fund. This invests in securitisations
that are backed by loans to SMEs issued by small banks and non-bank lenders.
Another initiative is the Australian Business Growth Fund. This will provide longer-term equity funding to
established SMEs looking to expand, and is jointly backed by the Australian Government and a number
of banks. It was launched with $540 million to invest in SMEs.
The Australian Government has also recently reformed insolvency laws for small businesses and
introduced a new scheme for monitoring how quickly large businesses pay their invoices. Both aim to
improve the environment for small businesses.
How Effective have Policy Measures been at Supporting
Credit?
Roughly a year on from the onset of the pandemic, it's useful to reflect on the effectiveness of the
various policies for small businesses.
The supply of finance remains tighter than before the pandemic, particularly for those businesses that
were hit the hardest. While there are signs that conditions have started to improve a little recently,
surveys of small businesses indicate that access to finance remains difficult (Graph 7).
Graph 7
Small Business Perception of Access to Finance*
Per cent of all respondents
ppt
%
Net balance**
Relatively difficult
40 10
Easier
access
30 0
Harder
access
20 -10
Relatively easy
10 -20
0 -30
2012 2016 2020 2012 2016 2020
*
Survey has asked about perceptions of changes in access to finance
relative to a previous period since July 2019; before that the survey
asked for point-in-time assessments
**
Net balance is the difference between the percentage of firms
indicating access is relatively easy and the percentage of firms
indicating access is relatively difficult
Sources: RBA; Sensis
Even so, the policy responses have helped to cushion the impact of tighter access to credit. The cash
rate cuts through 2020, and other initiatives to reduce banks' funding costs, have flowed through to
lower interest rates on SME loans. Outstanding rates on variable-rate loans to SMEs, on average, have
declined by about 85 basis points since February last year. This is a little more than the corresponding
decline in banks' funding costs, and interest rates on loans are still drifting lower. The Reserve Bank's
TFF has provided a strong incentive to banks to increase their overall lending to SMEs, and a range of
banks have been able to take advantage of this benefit. The Australian Government's loan guarantee
scheme has also put some downward pressure on SME interest rates. Some SMEs that have borrowed
unsecured through the scheme have done so at rates that are comparable to those for secured loans
issued outside of the scheme.
Although the spread between rates on SME loans and large business loans has increased over the past
year, the increase has only been slight (Graph 8). In particular, the widening is considerably smaller
than that which occurred at the time of the global financial crisis; although the spread had never
returned to pre-GFC levels. I should emphasise, however, that pricing alone does not provide a
complete picture on the availability of finance. Indeed, small businesses have reported that the price
has not been the biggest impediment to accessing finance over the past few years. For instance,
entrepreneurs in our small business panels have noted that access to finance for start-ups is a
challenge, banks often have substantial collateral requirements, and the process for getting finance is
lengthy and onerous.
Graph 8
Australian Business Lending Rates
% %
Outstanding rates*
8 8
Small loans
6 6
Large loans
SME
4 4
2 2
Large business
bps bps
Spread
150 150
50 50
2009 2013 2017 2021
*
Small loans data up to June 2019 reflect loans valued less than $2
million; large loans data up to June 2019 reflect loans valued $2 million
or more; from July 2019 new data are used from the Economics and
Financial Statistics (EFS) collection (See Statistical Table F7)
Sources: APRA; RBA
Over 200,000 SME borrowers arranged to defer their loan payments last year. The vast majority have
now resumed payments. The share of SME loans with a deferral peaked at 13 per cent in June
(Graph 9). It is now around 1 per cent. Consistent with these outcomes, modelling by large banks
suggests that the risk of default for small businesses relative to large businesses did not change much in
2020 (Graph 10). Nevertheless, business failures are expected to rise as some of the pandemic support
measures are phased out.
Graph 9
SME Loan Repayment Deferrals
Share of total SME loans by number
% %
10 10
5 5
0 0
J J A S O N D J F M
2020 2021
Sources: APRA; RBA
Graph 10
Business Lending Default Probabilities
Average estimate from internal ratings-based models*
% %
Default probabilities**
2 2
Small business
1 1
Large business
bps bps
Difference
150 150
100 100
50 50
0 0
2008 2011 2014 2017 2020
*
On-balance sheet exposures of major banks
**
Small business is the SME retail and SME corporate categories in
APRA's capital framework; Large business is the corporate category
Sources: APRA; RBA
SME lending overall has been little changed over the past year, in part reflecting the effectiveness of
various measures in supporting businesses' cash flow. However, there have been pockets of increased
financing activity. In the second half of 2020, commitments for new SME loans increased a little to
around the level seen in the lead up to the pandemic. Much of the increase owes to businesses
borrowing funds for the purchase of property, and plant and equipment. The latter is consistent with the
expansion of the Australian Government's instant asset tax write-off scheme.
Also, refinancing by SMEs has been higher over the financial year to date compared with the same
period a year earlier (Graph 11). This is consistent with businesses seeking to obtain a better deal with
the lower interest rates on offer.
Graph 11
Conclusion
Overall, smaller businesses have suffered significantly from the economic hardship caused by the
pandemic. A wide range of monetary, fiscal and private-sector measures have provided support. Indeed,
many of those measures obviated the need for small businesses to take out additional debt over the
past year. While businesses' confidence has improved markedly of late, a number of businesses,
particularly smaller businesses, remain reluctant to take out new loans. Some of this reflects an
economic outlook that, while improved, is still very uncertain. Also, access to finance for smaller
businesses has been a long-standing challenge. There are a range of policies in place to help support
the supply of business credit as the economic recovery proceeds. Given the importance of small
businesses to the economy, we will continue to pay close attention to their access to finance and their
prospects more broadly.
Endnotes
[*] I thank Joel Bank and Michelle Lewis for tremendous assistance in preparing this material.
[1] Information about the Small Business Finance Advisory Panel can be found on the RBA website:
https://www.rba.gov.au/about-rba/panels/small-business-finance-advisory-panel.html.
[2]
This month we expanded our coverage of finance for small and medium-sized enterprises (SMEs) in our monthly chart
pack, which is available on the RBA website: https://www.rba.gov.au/chart-pack/.
[3] Some of my colleagues at the Reserve Bank have written articles on the subject, which my remarks today draw upon.
See Bank J and M Lewis (forthcoming), 'Australia's Economic Recovery and Access to Small Business Finance', RBA
Bulletin, March and Lewis M and Q Liu (2020), 'The COVID-19 Outbreak and Access to Small Business Finance', RBA
Bulletin, September.
[4]
See, for example, the OECD's latest scoreboard on 'Financing SMEs and Entrepreneurs'
<https://www.oecd.org/cfe/smes/financing-smes-and-entrepreneurs-23065265.htm> and G20/OECD high-level
principles on SME financing <http://www.oecd.org/finance/G20-OECD-High-Level-Principles-on-SME-Financing.pdf>
[5] Indeed, Australia was the largest non-traditional finance market in the Asia Pacific region after China and the seventh
largest globally in 2018 (the latest year with comprehensive data). The largest sources of non-traditional business
finance in Australia are balance sheet lending (where the lending entity provides a loan directly to the borrower,
mechanically similar to traditional bank finance) and invoice trading (where the lending entity purchases unpaid invoices
or receivables from a business at a discount). Marketplace lending (which uses new technology to connect fundraisers
directly with funding sources, for example peer-to-peer lending) is not as common.