The latest annual SME Compass Report for 2024 by fintech SME lender Banjo Loans reveals that Australian SMEs are adapting to the challenging economy brought about by inflation and high-interest rates by cutting costs rather than passing on price increases to consumers.
The report also notes that only 49 per cent of SMEs feel positive about their future financial security, 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 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 explained that 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,” Callaghan added.
Callaghan said the 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,” he said. “That tells us that small businesses retain the grit and determination to overcome the economic difficulties and thrive despite manifold challenges.”
With regards to the state of lending, 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. However, bank loans declined by four points this year to 32 per cent as a reported current funding source, while alternative commercial lenders are seeing their popularity rise at 12 per cent compared to nine per cent in the previous year.
Callaghan said that 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,” Callaghan 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.”
