Business Banking - Growth and Recovery after the Global Financial Crisis

A look at how much money was borrowed over the last few years shows an inverse situation to that of interest rates. This is not surprising, as demand flattened because of the global credit crisis.

The graph below shows that at the start of 2007, business rates and volume of business loans were on par with the equivalent measures for residential home loans. As 2007 progressed, however, so did business lending, with the total amount lent to business overtaking that loaned for owner-occupied home loans.

Not long after October 2008, the margin started to develop between business and home loan rates. Total loans to business were on the decline, with a $13 billion reduction at the end of the 2008 year.

By October 2009, the tables had turned, and there was more money owing on home loans than there was on business lending.

Since then, lending to business has continued to decrease, with the latest data as at December showing the 11th consecutive reduction, but also the smallest of the 12 reductions on record. We eagerly await the release of January data to see if 2010 will herald the return of growth in business lending.

Changed Circumstances For Both Parties

The reduction in money loaned to business has been the result of changes facing both parties – lenders and business owners. Essentially business lending growth has been cut down with a double-edged sword.

On the demand side, businesses have been faced with uncertainty of future trading opportunities, amid market turmoil. Understandably, many have put expansion plans on hold, opting instead for a cautious approach to taking on further debt. Even the most adventurous of risk takers would have thought twice before racing off to borrow money under the circumstances.

Add to the fuel more businesses closing their doors and it’s easy to see the reasons behind a slowed demand for new business loans.

Countering this, however, has been an increased demand for overdrafts, a useful money stream when business reserves are drained and funding requirements still need to be met.

On the supply side, lenders have not been actively chasing business lending through tempting rates or advertising. Lenders have opted instead for a different advertising tack over the past 18 months. They have concentrated instead on the services they offer to business, and we have noted many advertising campaigns heavily focussing on this aspect of business banking.

We are only now starting to see the return of advertising highlighting competitive interest rates for business borrowers. This is the first sign that lenders are putting out the welcome mat and touting actively for new business again.

Business Looking Forward, Looking Back

A healthy recovery is a two way street. Businesses looking towards the future must be accommodated by willing lenders so appropriate opportunities and investments can be made to keep the economy moving forward at all levels.

It's doubtful, however, that business lending will quickly outstrip home loan lending again. The pain of the GFC is still etched in the minds of both lenders and businesses, and many lessons have been learnt, sometimes painfully.

During the GFC we heard many complaints of credit availability drying up for small businesses, as well as small businesses facing sudden re-risk rating, requiring them to provide greater security for their loans, or pay higher rates.

On the other hand, the Australian Bankers’ Association has been vocal in citing cost of funding and increased risk as contributors to the cost of business finance. The Association quotes Reserve Bank statistics showing that bank loans 90 days in arrears for unincorporated businesses are at 3.5% as at June 2009 (the most recent data available). This compares with 0.6% for home loans.

A recent survey undertaken for the Council of Small Business of Australia (COSBOA) confirmed that the cost and availability of finance is the top concern of small to medium Australian business enterprises.

To go through the facts and assist business recovery in this country, the Senate has just agreed to a proposal for an enquiry into the difficulties small business continue to face in getting access to adequate and affordable finance.

It is expected that all submissions will be considered and reported on by the end of June this year.

The Road to Economic Recovery

As the economy motors along the road to recovery, most can now see a light at the end of the tunnel for small business.

There’s still a way to go however but the ACCI-Westpac Survey of Industrial Trends over the past two quarters (Sept, Dec) reveals an economy on the gas but still with an eye on the brakes.

The survey, through its composite index, signals expanding activity for the first time since early 2008. December 2009 did show a slight dip in general business confidence, along with a taming of increased investment plans.

This can be largely attributed to the three consecutive rate RBA rate rises and the decision by the RBA to hold off raising the official cash rate this month may give more breathing space to many. It is, however, a positive turn of events from our last business star ratings report which painted a dim picture on the state of play six months ago. Let’s hope the situation continues to improve.

What's Good for Business?

Keeping a close eye on cashflow is an essential part of operating a business. Monitoring ingoings and outgoings and switching to better, more cost-effective ways of doing things also includes banking. How do your current banking accounts stack up? Is there an easy alternative that will save you money?

It's very unlikely anyone on the payroll has the time to compare the myriad of business banking products on offer. The number of products in the market is sizeable – 337 term loans, 69 overdrafts, 38 credit cards and 88 deposit accounts, making comparison an exhaustive task.

That's why the CANSTAR CANNEX business banking star ratings are so valuable. We assess business credit cards, deposit accounts and loans covering residential and commercial lending for both term loan and overdraft categories.

We compare rates and features to award five stars to products that offer outstanding value. This enables you to make an informed choice of suitable banking products, even if it is just to see how competitive your bank is.

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