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Lending Guideliness Toughened for Business

Tight lending policies emerge in January 2009 continue into 2010:

Small businesses seeking new or additional finance are now having to jump through extraordinary hoops to access funds. This suggests banks are anticipating a further slowdown in the domestic economy and are putting measures in place to protect the downside impact of defaults.

The emerging tight lending practices in Australia reflect what is happening globally, particularly in the US and Europe. According to the ACCI-Westpac Survey of Industrial Trends from the December 2008 quarter, the availability of credit to business remains a concern, with the level of difficulty to obtain finance at its highest since 1974.

Despite official cash rate reductions, and business lending base rates coming down, some businesses may find themselves paying higher rates than they would have a few months ago, due to the increase in the perceived risk of their business. This is not across the board but very much on an individual business case-by-case basis. Areas such as commercial property, retail and hospitality face the prospect of paying more for funding, as economic pressure continues.

This is expected to result in many businesses postponing expansion plans until the true impact of the credit crunch becomes clearer. The downside is fewer companies accessing capital can have the effect of hastening a recession. However, it is emerging that the critical challenge to business in 2009 is refinancing. Certainty of funding is now becoming more important than price, and banks are reining in the amount of leverage they have been willing to tolerate in the past.

Around Australia there have been a significant drop in commercial applications to councils for new projects, and many large scale developments have been placed on hold, while developers look for additional sources of investment capital.

Small business owners are also finding that the banks are looking for more security against the loans than in previous years, and it is now common for banks to take the family home equity as security along with the business assets.