Credit demand from retail businesses nosedives

The report built on the annual SME Compass Report and has revealed that while overall SME credit demand remains strong, the effects of a slowing economic environment have been hitting some sectors particularly hard.

According to the latest Barometer Report, overall loan applications at Banjo rose 13 per cent in the final three months of 2023, when compared to the previous quarter. Nearly a quarter (23 per cent) of loan applications came from SMEs with $5–$10 million in revenue, who were seeking an average loan of around $400,000.

However, applications from the retail sector plummeted by 44 per cent during the December quarter – despite the period including Black Friday and festive season spending.

Other sectors, including rental hire and real estate (down 50 per cent) and accommodation and food services (down 38 per cent), also experienced significant declines.

Banjo Loans chief executive Guy Callaghan expressed concern about the hardships faced by small retail businesses, citing a combination of cautious consumer behaviour, high interest rates, and inflation eroding household budgets.

He stated: “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 storefronts, 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.”

The findings mirrored the latest data from the Australian Bureau of Statistics (ABS), which this week revealed that Australian retail turnover fell 2.7 per cent (seasonally adjusted) in December 2023.

This followed a rise of 1.6 per cent in November 2023 and a fall of 0.2 per cent in October 2023.

Ben Dorber, ABS head of retail statistics, said: “The large fall in retail turnover in December was caused by a fall in discretionary spending. Consumers brought forward some of their usual December spending to November to take advantage of Black Friday sales.

“This shift in spending from December to November reflects the growing popularity of Black Friday sales and the impact of cost-of-living pressures, with consumers seeking out bargains and taking advantage of discounts in November.

“While there was a large seasonally adjusted fall in December, retail turnover rose 0.1 per cent in trend terms. This shows that underlying retail spending remains subdued when we look through the volatile movements over recent months in the lead-up to Christmas.”

Which sectors are seeking more credit for growth?

On the other end of the spectrum, the Banjo SME Business Barometer Report found that industries such as electricity, gas, water, and waste (up 60 per cent, albeit from a low base) and healthcare and assistance (up 29 per cent) all saw notable increases in applications.

There was also consistent demand for funding from construction and manufacturing businesses, with applications from the former steadily climbing over the past three quarters.

Victoria emerged as a standout state, driven by strong growth in construction loan applications attributed to ongoing large infrastructure projects, such as the state government's pipeline of public works, including road and rail network upgrades and new childcare centres.

Mr Callaghan noted continuing good demand 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.

“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.”

Despite the gloomy scenario for the retail sector, Mr Callaghan offered a glimmer of hope, pointing to signs of improvement on the horizon. He cited the fall in inflation during the September quarter and anticipated further declines in the December quarter, potentially boosting consumer confidence.

“That should give consumers more confidence to spend and bolster the position of retail small businesses looking to grow and expand,” he said.

“The RBA may also make a favourable decision not to increase the cash rate next month, which would provide further relief.”

Speaking to The Adviser, the Banjo CEO said he hoped brokers could use the data to understand their SME client base and their current challenges and opportunities.

Mr Callaghan said: “Data is king so the Banjo Barometer is a handy tool for brokers who need to know which industries and sectors are performing well so they can then target businesses from those sectors that are looking for additional funding to grow.

“On the flipside they can understand which industries are struggling so they can work closely with clients from those sectors to be prepared with clear financial plans when they approach lenders for loans and be in a strong position to succeed.”

The CEO suggested that If brokers have clients or prospective clients from struggling sectors, “one simple way for brokers to improve their approach is to call clients and have a conversation about how they are going so again they can better understand their needs”.

“The Banjo Barometer is a key dataset but it’s important to remember that doing research into other reports is helpful for forming a more complete picture into what is happening in the economy on a sector-by-sector basis,” he said.

[Related: SMEs unfairly ‘penalised’ by credit scoring system, brokers warn]