Retail sector funding rattle by challenging economic climate

Retail sector funding rattle by challenging economic climate

Retail businesses are feeling the most pain from the economic slowdown, with loan applications crashing by almost 50 per cent and arrears increasing during the December quarter, the Banjo SME Business Barometer Report has revealed.

The Barometer provides a quarterly snapshot of Banjo’s lending to a wide range of Australian SMEs, including data on loan size history, industry, location, new applications and overall quality of those applications, thereby offering insight into the fortunes of small businesses and their industries.

It builds on Banjo’s SME Compass report, which comes out annually and surveys SME sentiment on the challenges and opportunities available in the coming year, such as hiring staff and access to credit.

Key data from the Q2 Barometer Report includes:

  • Loan applications submitted to Banjo rose by 13 per cent compared to Q2 FY23 although remain well down on the highs of Q4 FY23 due to seasonal factors and significant economic constraints including high interest rates.
  • Unsurprisingly, applications from the retail sector fell by a 44 per cent in Q2 FY23, with other sectors such as rental hire and real estate (down 50 or cent) and accommodation and food services (down 38 per cent) also experiencing steep declines.
  • Industries seeing large increases in applications included electricity, gas, water and waste (up 60 per cent albeit off a low base) and health care and assistance (up 29 per cent).
  • Funding demand from construction and manufacturing businesses has remained robust, with applications from the former steadily climbing in the past three quarters (up four per cent in Q2).
  • More than 23 per cent of loan applications came from SMEs with $5 million to $10 million in revenue for an average loan of around $400,000 in this cohort.
  • Victoria was the standout state driven by strong growth in construction loan applications due to the continuation of large infrastructure projects in the state.

Banjo Loans CEO Guy Callaghan said small retail businesses had been hard hit by a combination of cautious consumers, high interest rates and inflation eroding household budgets.

“The fall in loan applications from retail SMEs is largely down to these businesses not having the confidence to go for funding to grow their businesses in the current climate. In normal times we’d be seeing far more loan applications for things like upgrading store fronts, marketing spend or hiring more staff.

“These businesses are battling a myriad of issues and challenges which won’t be going away in the immediate term.”

Callaghan said they were monitoring arrears in loans from retail businesses as a result of the tough economic climate.

However, it was not all doom and gloom with signs of improvement on the horizon.

“We saw inflation fall in the September quarter and the indications are it will fall further when the December quarter figures are released at the end of the month.

“That should give consumers more confidence to spend and bolster the position of retail small businesses looking to grow and expand. The RBA may also make a favourable decision not to increase the cash rate next month, which would provide further relief.”

Callaghan said it was positive to see consistent funding demand coming from manufacturing businesses, particularly from NSW-based businesses.

“We think this could be because of the continued weakness of the Australian dollar which is providing opportunities for manufacturers to be more competitive overseas,” he said.

“Another Barometer highlight is the resurgence in construction funding applications in Victoria which is down to the State Government’s significant pipeline of public works including upgrades to the road and rail network and new childcare centres.

“It is also positive to see that while the average loan size in Western Australia and South Australia has decreased, the number of applications continues to rise.”

Callaghan said the overall quality of loan applications had also improved from the first quarter, with encouraging signs also emerging from the weighted average of Banjo’s Credit Rating Scores.

The SME Business Barometer Report includes Banjo’s latest quarterly key data such as SME business lending activity by; loan size history, industry, location history and new application activity, loan application quality, where available.  By measuring the number, quality and volume of applications, activity by region, and repayment behaviour, it offers insights into the fortunes of the small business sector and the industries they operate within.