SME Lending for Finance Brokers Beyond COVID-19

While many industries have been negatively affected by COVID-19, there is still demand for business lending and opportunities for finance brokers. 

Business confidence took a big hit back in April, and it was worse than GFC. But despite a lot of doom and gloom in the media, business confidence in Australia is bouncing back, the vast majority of businesses are feeling positive. In July 2020, 81 per cent of businesses operating at full capacity were ‘very confident’ they could remain in business for the next six months. At the same time, approximately 55 per cent of businesses not operating at full capacity reported they too were ‘very confident’ they could stay open for the next six months. 

More recent survey data, from 21 August 2020, revealed that the percentage of businesses expecting to increase staffing levels stood at 15 per cent, up slightly from the previous fortnight. The proportion of businesses expecting to decrease staff was 5 per cent, so three times more businesses expect to increase staffing levels rather than decrease them.

It has been estimated that around 53,000 Australian businesses are at risk of failure due to COVID-19.  Although this is a frightening number, it’s worth noting that there’s a natural Australian business exit rate. The RBA has done firm-level analysis to estimate that a decline in annual sales of 20 per cent would lead to an increase in the annual business exit rate from 8 per cent to 9.5 per cent. That’s equivalent to an extra 35,000 business exits. Deloitte Access Economics has crunched the numbers more recently to claim 240,000 businesses are at risk of failure. We can expect to see business closures, but the number is not necessarily a large increase from the annual business exit rate from the previous period. 

In its Financial Stability Review, released in October 2020, the RBA states that business failures will increase, but expressed uncertainty about the magnitude and timing of these. This will depend on how well the economy recovers, which will be affected by the length and severity of COVID-19 disruptions, and how and when various business support measures are wound back.

Despite a panicked lead-up to the June jobs data drop, let’s remember, this actually beat consensus and most expectations. The good news was driven by a pickup in part-time not full-time employment, but it marked a solid start, which is important considering economic recovery can go sideways. That’s why the weekly jobs and wages data should be taken with a grain of salt, and we must always take the broader view. This is a short time series making empirical judgments difficult and likely subject to large errors. 

Looking at the big picture, things are returning to normal across most of Australia, besides Victoria. In June, most industries added employees on their payrolls again, and by the end of the month, around 35 per cent of payroll jobs initially lost had been regained. As per the most recent ABS data (mid-August), wages across Australia were down 5.2 per cent from the middle of March. At their worst, wages were down 7 per cent towards the end of May. Considering the picture again, this is a positive sign.

While many industries have been negatively affected by COVID-19, there is still demand for business lending and opportunities for finance brokers serving SMEs. 

In Australia, on average, there are 9,900 internet searches per month for ‘business loans’ and 3,600 for ‘small business loans’. According to Google Trends, interest in business loans and small business loans spiked at the end of March 2020, but has since stabilised to the average levels seen over the past 12 months. 

We know several industries have been strongly impacted by COVID-19. On Moula’s end, here’s what we’re seeing from SMEs with a decline in new applications, compared to the pre-COVID period: 

• Health and social assistance down 65.9 per cent
• Rental, hiring and real estate services down 62.2 per cent
• Arts and recreation services down 59.9 per cent
• Information and telecommunications down 46.3 per cent
• Accommodation and food services down 38.6 per cent
• Agricultural, forestry and fishing down 36.0 per cent
• Education and training down 26.2 per cent.

Despite some SME industries experiencing a downturn, we’re seeing increased demand for business lending for some sectors: 

• Financial and insurance services up 109.5 per cent
• Public administration and safety up 53.7 per cent
• Mining up 38.3 per cent
• Professional, scientific and technical services up 32.1 per cent
• Wholesale trade up 24.5 per cent
• Construction up 7.0 per cent
• Retail trade up 2.4 per cent.

Despite some SMEs experiencing a downturn, there are other key industries where we’re seeing increased opportunity. In Australia, manufacturing peaked as a portion of GDP in the 1960s when it was around 30 per cent of GDP. It’s now around 5 per cent of GDP. The decline was accelerated after tariffs were removed in the 80s and 90s.  

The Ai Group Australian Performance of Manufacturing Index (PMI) jumped to 53.5 in June of 2020 from 51.5 in the previous month. If you’re not familiar with this benchmark, it measures growth in manufacturing. A number of 50 represents expansion, while a number under 50 represents contraction. The overall trend in the past 10 years has been upwards.  Although it dropped down to 49.3 in August 2020, the forecast is for the PMI  to increase slightly above 50 between late 2020 and 2022. 

The COVID-19 pandemic has shown the importance of local manufacturing in essential areas. As part of the Federal Budget released in October 2020, the government reiterated its support for Australia’s manufacturing sector. The Modern Manufacturing Initiative will focus on six national manufacturing priorities, including:

• Resources, technology and critical minerals processing
• Food and beverage manufacturing
• Medical products 
• Clean energy and recycling
• Defence industry
• Space industry.

When it comes to high-growth industries, the Australian Government expects strong employment growth in professional, scientific and technical services over roughly the next five years. In the five years to May 2024, the Government projected that professional, scientific and technical services would see employment growth of 15.1 per cent – and that was before the pandemic.

Through the crisis, we’re seeing a renewed push for Australia to become an ‘innovation nation’. Demand for scientific research services has spiked, particularly in medical research. These tend to be good businesses with a view to do good for society, with relatively low revenue volatility. This is a large and diverse industry, and includes SMEs offering legal and accounting services, veterinary services, and computer system design.

Obviously, retail has taken a hit, but another key industry for growth is e-commerce. This chart illustrates the year-on-year trend of e-commerce revenue growth in Australia since January 2020. E-commerce has been growing each month this year, hitting peaks in mid-July and mid-August at nearly 120 per cent year-on-year growth. The pandemic and changing consumer behaviour point to continued growth of online retail. This includes bricks and mortar businesses expanding online and strictly online businesses. 

In addition to the pandemic, other factors have been fuelling the growth of e-commerce. These include demographic change and evolving consumer behaviour.

In Australia, Millennials have overtaken Baby Boomers as the largest proportion of the adult population, while the proportion of Generation Z adults continues to increase. These generations are more accustomed to spending time online and prefer using business-to-consumer (B2C) or direct-to-consumer delivery channels.

Globally, product assortment, convenience, and price competitiveness are encouraging a consumer shift to online purchasing. Similarly, a study of Australian consumers shows that price competitiveness and convenience are motivators for online shopping.

In just three and a half years to September 2019, the value of commercial loans settled by mortgage brokers through aggregators in Australia almost doubled. The increase in brokers writing commercial lending suggests that in a challenging home loan market, more brokers are diversifying into this sector, expanding their portfolio beyond just residential home loans into faster-growing sectors. 

The total book value of commercial lending for mortgage brokers through aggregators reached a record high of $43.1 billion in September 2019. In the face of an economic slowdown, the case for diversification into commercial lending only becomes more compelling. With repayment holidays in place, there’s less stock on the market. And even with current government and mortgage support, national housing prices have fallen for the fourth straight month. 

While many industries have been negatively affected by COVID-19, there is still demand for business lending and opportunities for finance brokers. As always, if you have any scenarios, our BDMs are a valuable resource, and will be happy to workshop any deals to help ensure we get the best outcomes for you and your clients.

As part of the 2020-2021 Federal Budget, the instant asset write-off has been extended to assets purchased by 30 June 2022. In addition, the maximum value of $150,000 per asset has been removed, so businesses can deduct the full value of an asset in the financial year it was purchased. 

To be eligible, businesses must have a turnover less than $5 billion. Also the asset needs to be installed and operational to qualify for the write-off in the financial year. 

This instant write-off applies to most assets – from business laptops to industrial machinery. There are a few exclusions, including capital works, horticultural plants, intangible assets (such as customer lists), and assets allocated to a software development pool. 

Many SMEs will be in a position where they want to purchase assets and receive the accelerated tax benefits but don’t have the cash flow to do so. Finance brokers have a role to play in helping these businesses get the funds they need.