Banks fear for small business when the support is turned off

If there’s one niggling fear keeping senior bankers awake at night, it’s the worry what will happen when more than 200,000 small businesses – who collectively owe their lenders close to $60 billion – finally come off life support.
The country’s banking community sprang into action in March when it became apparent the economic lockdown caused by the coronavirus pandemic would have a dire effect on the cash flows of small- and medium-sized businesses.

The banks allowed small businesses that had been adversely affected by the pandemic to defer principal and interest payments on their business loans for six months. Roughly 98 per cent of all businesses were eligible for help.

Normally bustling city streets are largely deserted as hundreds of thousands of employees work from home.  

Now that businesses are about halfway through their loan repayment holiday, they are being contacted by their bank, which is keen to find out whether they are in position to resume loan payments, or whether they would like to keep their repayment holiday going for a further three months.

According to the major banks, around 10 per cent to 15 per cent of their small business clients that opted to take a loan repayment holiday have decided they are now in a position to restart their repayments.

Other small businesses are less confident that their cash flows will rebound quickly as restrictions are lifted. These firms are opting to continue to defer their loan repayments for a further three months in case their cash flows remain under pressure.

As National Australia Bank boss Ross McEwan told ABC Radio this month: “We’ve started making contact with our own customers now, just doing a check with both business and mortgage customers to see what’s happening with them.

“It’s been interesting, about 10 per cent to 15 per cent of them have said, ‘look, we’re actually in pretty good shape, please put our payments back on’.

“The rest have said, ‘see how we’re going in the next month or two as I get my job back’, or ‘I get my business back up running’.”

As at June 19, banks had deferred some 216,372 business loans, with a total value of $59.9 billion, according to figures from the Australian Banking Association.

But some bankers are deeply concerned that many small business customers will not be able to resume their normal principal and interest payments when the six-month loan repayment holiday expires in September.

“We’re still going through the process of talking to them,” one said. “We are getting people coming out of it now, but we’re also getting people who are now coming in to ask for deferrals.”

The banker said it was impossible to accurately gauge how many small businesses would collapse.

But, he added: “There is going to be a large portion of customers who won’t return to normal payments at the end of six months. Not every business is going to survive.”

Bankers also point out that boards of medium-sized firms are beginning to focus on the duty of directors to prevent companies trading while insolvent.

As part of its response to the coronavirus pandemic, the federal government decided to relax insolvent trading obligations in March, but this suspension of insolvent trading laws is due to expire on September 25.

The collapse in small business cash flows is starkly evident in an Australian Bureau of Statistics survey on the impact on business of COVID-19.

The survey of 2000 businesses – conducted between June 10 and June 17 – found that 26 per cent had experienced a drop in revenue of up to 25 per cent; 37 per cent suffered a fall of between 25 per cent and 50 per cent; 17 per cent suffered a fall of 50 per cent to 75 per cent; while 14 per cent of businesses reported their revenues had plunged by more than 75 per cent.

The collapse in revenue was concentrated in particular sectors of the economy, with more than 80 per cent of businesses in education and training, accommodation and food services, media and telecommunications, and arts and recreation experiencing a significant drop in earnings.

According to senior bankers, the revenue declines are also concentrated in particular geographic locations.

The major banks are extremely concerned about the financial strains being felt in south-east Queensland, such as the Sunshine Coast and Gold Coast.

There are also fears that the renewed lockdowns in Victoria will deal a hefty blow to small businesses in that state.

In addition, banks are worried about small businesses located in the CBDs of the major cities, which are now without tourists and foreign students, and as hundreds of thousands of employees work from home.

This means that many small businesses in hospitality – such as coffee shops and restaurants – as well as retail, are suffering a hefty blow to earnings.

Banks warn that business borrowers should not assume that when the loan repayment holiday ends in September that banks will automatically extend it for a further three months.

They are wary of allowing customers to defer their loan repayments indefinitely, because this would only leave businesses saddled with even larger debt levels.

But they say that by September they should be able to offer struggling businesses more targeted support.

Although there are concerns that some small businesses will struggle to ever repay their loans, banks are eager to stress that they have been keen to finance credit-worthy small businesses.

Since late April, banks have lent an additional $18.9 billion to small- and medium-sized businesses, and a further $4.5 billion to sole traders.

Small businesses have clearly turned to their banks to help cover their short-term funding needs.

The country’s banks have increased the loan facilities they provide to existing clients by $4.5 billion, and have also boosted overdraft facilities by $4 billion.

Still, bankers report that many businesses – particularly in hard-hit sectors such as tourism and education – are extremely wary about taking on new debt.

Most of the extra debt that businesses have taken on has been to help them survive the crisis, given the severe collapse in their revenue.

Banks say businesses are unlikely to be emboldened to borrow in order to fund new investment until there is evidence of a more sustained economic recovery, and a greater willingness on the part of consumers to open their wallets.

And as the economy returns to more levels of activity, it will also be easier for banks to assess the sustainability of particular businesses, and to make better-informed decisions on their credit risk.

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