Rise in asset finance lending amid SME loan decline

The latest Equifax Quarterly Commercial Insights for the September quarter of 2023 showed that overall business credit had fallen by 5.2 per cent compared to the same period last year.

This marked the largest year-on-year drop in demand since 2021.

According to the report, the decline in overall business credit demand was driven by a decrease in business loan applications, which were down by 8.8 per cent, and trade credit applications down by 3.5 per cent.

Both of these figures fell in Q3 2023 compared to the same period last year.

However, asset finance applications continued to buck the trend, increasing by 5.2 per cent in Q3.

General manager commercial and property services of Equifax, Scott Mason, said: “Higher interest rates and overall market uncertainty has led to subdued trade credit and business loan demand this quarter, contributing to a greater than expected drop in overall commercial credit demand.”

As household savings ratios drop and consumers’ spending power falls, there is growing pressure on businesses, he said.

“Despite these challenges, however, demand still remains above pre-pandemic levels,” Mr Mason said.

Business growth plummets

According to Equifax data, the 2022–23 financial year saw the lowest growth in the number of Australian businesses since FY19–20.

The FY22–23 ended with neutral net growth of 0.8 per cent in the number of Australian businesses, with an annual entry rate of 15.8 per cent and an exit rate of 15 per cent.

This is a significant drop from the previous financial year, which saw a net growth rate of 7 per cent.

“The tougher economic climate is having an impact on many businesses, with some of Australia’s largest industries seeing negative growth in overall business numbers,” Mr Mason said.

“The construction industry, for example, recorded the first negative growth in business entities since 2019.

“All construction subdivisions had higher exit rates compared to previous financial years, and the industry saw a record high number of defaults at 25 per cent above last financial year.”

In fact, the construction industry recorded the largest share of insolvencies in Q3, at 31.5 per cent of all cases recorded.

This report coincided with that of CreditorWatch, which cautioned that business conditions will be extremely challenging for several sectors, particularly food and beverage and construction.

However, CreditorWatch also noted that overall company profits are in remarkably good shape, with businesses broadly categorised within the retail and industrial sectors recording a 41 per cent increase in gross profits between June 2019 and June 2023, while businesses in the office sector reported a 13 per cent increase over the same period.

In addition, while the construction industry has been faced with rising costs, supply constraints and labor shortages, costs have eased for the first time in three years, according to the Australian Bureau of Statistics.

House construction remained unchanged at 0 per cent in the September quarter of 2023, marking a notable shift from the previous 16 quarters, which saw consistent price increases since the December quarter of 2019.

[Related: Housing costs stabilise after more than 3 years: ABS]