SMEs continue to invest and innovate in face of challenging economy: Banjo SME Compass Report

Australian small to medium enterprises (SMEs) are adapting to the challenging economy by cutting costs rather than passing on price increases to cautious consumers as they seek to counter sticky inflation and high interest rates.

The latest annual SME Compass Report for 2024 by fintech SME lender Banjo Loans reveals a difficult picture for the sector with only 49 per cent of small to medium enterprises feeling positive about their future financial security.

It means positivity is down eight points since the start of 2023 – and a nine per cent drop in the number small businesses believing they will have a big year.

Inflation remains the number one issue for Australia’s SMEs, with two thirds identifying it as a key growth barrier this year – far above the end of 2022 when it was one in two.

The agriculture, hospitality and financial services industries were the most likely to report being impacted by inflation with health care and social assistance, professional scientific and tech services and the wholesale trade the least likely to say they were affected.

Significantly, while 47 per cent of businesses increased their prices to deal with inflation in 2023, just 34 per cent of businesses plan to do the same in 2024.

Banjo Loans CEO Guy Callaghan said SMEs were wary of passing on further costs to consumers whose spending had already been squeezed by inflation and numerous interest rate increases.

“Businesses are under pressure to find other ways of reducing costs rather than increasing prices due to still challenging macroeconomic conditions,” Callaghan said.

“In 2023, 61 per cent of SMEs increased prices due to higher supplier costs, however they seem to be indicating that further price increases will only result in further reductions in spending.

“This has flow on effects for things like recruitment, with 50 per cent of SMEs saying they plan to increase their staff numbers this year, down seven points since January 2023.”

Other findings in the annual SME Compass Report included:

• Fewer SMEs hitting their revenue targets in 2023 compared to the previous year (62 per cent versus 65 per cent).
• A solid 78 per cent confident of the long-term future of their business, albeit this was down by four points compared to the start of 2023.
• Less concern about labour shortages than in the past, with 36 per cent concerned about future staff hiring challenges compared to 42 per cent in 2023.
• SMEs in the Northern Territory (90 per cent) and Tasmania (89 per cent) were the most likely to feel confident about the year ahead, while Victorian SMEs came bottom with just 77 per cent reporting the same level of confidence.

Callaghan said the SME Compass findings reinforced the importance of businesses continuing to invest and innovate to succeed in an increasingly complex and challenging economic environment.

“Of those SMEs that achieved their revenue targets, 63 per cent invested in new technology and 61 per cent purchased significant new assets/equipment.

“That tells us that small businesses retain the grit and determination to overcome the economic difficulties and thrive despite manifold challenges.”

Turning to the lending environment, the report found that 52 per cent of SMEs plan to leverage external funding to grow, with this number rising to 64 per cent of small businesses who expect to achieve or exceed their revenue targets over the next year.

Bank loans declined by four points to 32 per cent as a reported current funding source, while alternative commercial lenders like Banjo are seeing their popularity rise with 12 per cent using non-bank products in 2023 compared to 9 per cent in the previous year.

Callaghan said non-banks were becoming a larger source of funding because of their ability to provide tailored products to businesses that suited their needs.

“We spend more time getting to understand the needs of our customers and their challenges and opportunities, which means we’re able to come up with a plan that is shaped around their own unique goals,” he said.

“We combine that with innovative products such as asset and equipment finance which enables businesses to replace ageing equipment, consolidate existing debts and release equity they have in existing assets, when they need it. That’s a powerful tool for businesses looking to expand, grow and innovative.”