Australian SMEs have faced the most uncertain economic period in a generation, which makes it all the more encouraging to see “green shoot” signs for the small business sector.
It’s important to acknowledge these green shoots, before detailing some of the more pessimistic sentiments SMEs outlined.
Many businesses, depending on where they are based and what sector they are in, have come through the “one-in-100-year crisis” feeling like they have dodged a bullet.
Of the 1253 small businesses East & Partners polled for this research 685 are planning to invest in their own growth over the next six months. This is a small but promising uptick from late 2020, when only 650 were willing to invest.
The Index also recorded an eight-point rise in average SME revenue growth forecast for the first half of 2021, reflecting a strong bounce back in confidence for many businesses.
These indicators are positive, and the responses from small business owners involved in our research indicate they are very eager to get back to “business as usual”.
But there is a need to be realistic about what lies ahead. Half the businesses polled this round are not confident enough to invest back into the business – the full potential of the SME sector will not be reached until more businesses are comfortable and willing to do so.
Uptick in businesses looking to close or sell
With Australia’s vaccine distribution gathering pace, a degree of normalcy should gradually return. However uncertainty around future clusters, lockdowns or border closures and the lack of easy access to and from other countries continues to disproportionately impact some businesses.
With the COVID-19 realities of 2020 dragging into 2021, the March 2021 SME Growth Index asked small businesses about their intentions if market conditions do not improve.
Only half of those polled have NO plans to close or sell under current market conditions.
The number looking to exit their business has increased since the last round.
Now, one in three small businesses (34.2%) say they will have to close (14.2%) or sell (20%) unless conditions significantly improve, up from 31.2% in late 2020. This increase in pessimism is despite the absence of major border restrictions at the time of polling in January-February 2021.
At the time of writing Queensland again finds itself in lockdown, highlighting the uncertain operating conditions facing businesses across Australia.
Over and above the significant cohort contemplating drastic action within their business, a further 15% of small businesses are unsure about what action to take if conditions don’t improve.
Strategies for recovery – many will restructure
At the time of writing SMEs are confronting the end of the JobKeeper program designed to stem job losses and business failures during the pandemic, and much of eastern Australia is dealing with the aftermath of severe flooding.
Many small businesses are unsettled and still unsure about how to handle recovery and growth.
When asked what measures they will put in place in 2021 to recover from the pandemic, or to take advantage of opportunities, overwhelmingly SMEs are looking at their business structure, including funding options.
Two-thirds (64.6%) plan to take a full look at operations to work out the best way forward.
This comes as the Federal Government’s new small business restructuring laws are in force, aiming to make it easier for eligible businesses to reset their balance sheets and return to profitability.
SMEs are considering different strategies to replace their reliance on government stimulus funding. One in five (21.6%) will have to cut costs and one in six (15.2%) plan to use a working capital finance facility to replace stimulus funds.
One in five overall, and one in four larger SMEs, say they’ll have to move head office or downsize. Other strategies SMEs will use to handle recovery and growth in 2021 include: sourcing new funding (12.5%), entering new markets (8.9%) and pursuing merger and acquisition opportunities (5.1%).
It is highly concerning that a significant cohort of one in four SMEs (25.9%) are unsure about what measures to put in place to plot their path through recovery.
This indecision is more noticeable at the smaller end of the SME market: one in three businesses in the $1m-5m revenue category are unsure compared with one in five $5-20m enterprises.
Funding is crucial for recovery and growth
Recovery is uneven and varies significantly by state, region and industry.
Pandemic measures kept the rate of insolvencies low in 2020 but the Reserve Bank of Australia has flagged that it expects small business failures to rise this year.
This raises some anxieties for the start of Q2 2021 when stimulus measures are no longer in place. ASBFEO has gone as far as to urge small businesses to secure their assets through the Personal Property Securities Register (PPSR) so that they are better protected in the event of insolvency.
For any small business that went into the pandemic already experiencing cashflow issues, the end of JobKeeper may rapidly compound their problems.
Potentially of bigger impact than the end of JobKeeper is when the ATO gets tougher about chasing debt. This should be a point of focus for $1m-5m revenue businesses, given they’ve indicated that making ATO arrangements will be one of their go-to working capital management strategies.
Regardless of whether their focus is growth or recovery, Australia’s new small business ombudsman, Bruce Billson, says SMEs’ best shot at success is getting access to, and putting in place, adequate funding and seeking professional advice to help guide them through this period and achieve their business goals.
Despite low uptake in 2020, loans under the SME Guarantee Scheme have been expanded. The loan limit has increased from $1m to $5m, with turnover cap rising from $50m to $250m. The government is now bearing an 80-20 risk split with the banks (replacing the 50-50 risk split). It remains to be seen whether there will be improved take-up of the extended scheme, given the clear reluctance of SMEs to saddle their businesses with more debt.
Whether a business is looking to take advantage of opportunities, or whether they are anxious about how the end of JobKeeper will impact their working capital, they should be talking to professional advisers about the best way forward.
This includes SME owners being open to look at funding methods beyond traditional bank funding, along with putting funding in place early, so that if they run into cashflow issues they can smoothly move forward with new sources of funding.