Why are small business loans halting in Australia? | Western Advocate

The discontinuation of the SME Loan Recovery Scheme, aimed at providing relief to the impact of COVID-19 by supplying government-supported small business loans, comes around the same time as local and global instability is dominating headlines.

From both global and domestic inflation impacting monetary policy in almost every country, technology companies bleeding into lower valuations, and startups halting their growth or even firing staff, to the strict COVID-19 regime in China leading to more disruptions in the supply chain, the war in Ukraine, and the Australian election and its aftermath, there is a lot of uncertainty in the air. And when there’s uncertainty, growth is hindered.

The SME Loan Recovery Scheme’s discontinuation isn’t a big deal on its own, says Alon Rajic, the managing director of Finofin which operates SME finance comparison site Small Business Loans Australia.

“The vast majority of applications [for the Loan Recovery Scheme] are turned down anyway,” he said. “Based on a sample of several thousand business owners and sole traders who have applied through Small Business Loans Australia’s partners, only a handful of businesses were deemed eligible.”

Mr Rajic, whose company also operates small business guides in the US, said the SME Loan Recovery Scheme was very different to the Paycheck Protection Program loans in the United States.

“For a PPP loan, you just needed to make sure your application gets through the door before PPP’s money runs out, plain and simply,” he said. “When your application was approved – and it was only a question of when rather than whether – you’d become eligible for an instant government-backed loan capped at 1.75 per cent per annum interest rate.

“It’s a very different kind of set in comparison to Australia’s SME Loan Recovery Scheme loan, which is capped at 7.5 per cent/per annum interest. Additionally any portion of that PPP loan that went towards payroll or eligible business expenses, was forgiven and deducted from the loan amount turning into more of a small business grant than a small business loan, really.

“The PPP made an incredible impact on the small business economy in the US during the COVID crisis, while the SME Loan Recovery Scheme didn’t, and still doesn’t. When it stops soon, not many would notice.”

While Mr Rajic doesn’t believe the Recovery Scheme made a big difference when it came to access to business loans, he does think the other factors in play such as inflation, election, and global tensions are causing uncertainty for the vulnerable small business sector and fueling reluctance to take out loans to invest in their business.

When small businesses are afraid to borrow money, it’s a bad signal about future growth, he said.

“May is traditionally one of the strongest months of the year for small business financing – many businesses restock during this period preceding the end of the financial year.

“This year is also the first proper post-COVID year for Australian small businesses, but still there were less applications for loans and fewer small business loan deals taking place than expected, adjusted to seasonality.”

Mr Rajic said Australian small businesses seemed to be “sitting on the fence”, preferring to preserve cash and stay away from debt as much as they can.

“That is not a bad thing to do, considering the potentially turbulent times ahead, but it is somewhat of a bad omen for the broad economy,” he said.

“It stands in line with the most recent statement from the RBA monetary meeting for May which warned about halted growth in the months ahead as a result of inflation pressures and the other global factors previously discussed.”

Finofin is a content specialist business with more than a decade of experience in producing successful comparison websites on a global scale including business loans specialist site Small Business Loans Australia.

This is branded content for Finofin.