40% of SMEs to cut costs and postpone investments in FY23

A significantly taxing financial year is forecasted for Australian businesses, with many already feeling the pressures of a tight labour market, capacity constraints, tighter borrowing criteria and supply chain disruptions according to Small Business Loans Australia.

In March 2022, the business exit rate in Australia reached almost 4 per cent as inflation and interest rates were projected to continue rising. New research from a financial comparison website uncovered some of the financial decisions SMEs will make in FY23 to guarantee their survival.  

A survey of an independent panel of 253 Australian SME owners, commissioned by Small Business Loans Australia, a free comparison website helping businesses find the best loan options, found that 85 per cent of businesses will make tough choices to see them through the other side of a challenging financial year. The full survey results, including breakdowns across ages and States, can be found here: smallbusinessloansaustralia.com/resources/australian-smes-2023.html

Specifically, 40 per cent of business owners will postpone planned investment, such as equipment, new hires and technologies, and 40 per cent will reduce their personal income.

Thirty-nine (39 per cent) will cut costs by switching to lower-cost suppliers and cutting discretionary business spending, while 11 per cent will unfortunately let go of some employees.

Some participants propose to raise available funds to resolve their existing liabilities: 10 per cent will refinance or find ways to pay off their debts quickly and an additional eight (8) per cent of respondents will seek financing to help the business through the tough period.  

Alon Rajic, founder and CEO of Small Business Loans Australia, says: “Our research suggests that small business owners will do everything they can to minimise the impact of fast-growing inflation and interest rates on their business, including cutting costs and even underpaying themselves. They will aim to avoid incurring larger businesses debts while rates are still rising, which will directly impact their investment spend. However, businesses know recessions usually don’t last long, so thankfully letting go of their employees seems to be a last resort, and only if needed.”

The survey also found that the smaller the businesses, the more likely are the owners willing to reduce their own pay: 45 per cent of owners of micro businesses (1-10 employees) would pay themselves less, compared with 31 per cent of owners of small businesses (11-50 employees) and 27 per cent of medium-sized businesses (27 per cent). 

Conversely, the larger the business, the more likely they are to let go of employees this financial year: 24 per cent of medium-sized businesses, compared with 17 per cent of small businesses and just 7 per cent of micro businesses.

Larger businesses are also more likely to forego planned investments (56 per cent of medium-sized businesses, compared with 43 per cent of small businesses and 36 per cent of micro businesses). They are also more likely to cut discretionary spending or switch to lower-cost suppliers (50 per cent of medium-sized businesses, compared with 30 per cent of small and micro businesses).

Respondents were also asked to identify at least one of the biggest challenges, from a list of six, that they expect to face in FY23. Unsurprisingly, inflation topped the list of challenges, chosen by 42 per cent of respondents, followed by reduced customer spending due to inflation and rate rises (chosen by 41 per cent of respondents).

More than a quarter (28 per cent) of respondents considered the rapidly rising interest rates as a major challenge, whereas just 22 per cent deemed their obligation to pay higher wages due to the minimum wage increase as their toughest obstacle this financial year.

A smaller consensus indicated their biggest concern will be either the inability to fill roles due to candidate shortages (19 per cent), or struggle with accessing financing and servicing loans and other debts (11 per cent).  

“Our results suggest that inflation and a potential recession will have a bigger impact on the SME sector than the 5.2 per cent increase to the national minimum wage and a shortage of workers. Despite a 10 per cent decrease in the number of unemployed people in June this year, price hikes and reduced consumer spending come out on top as the biggest obstacle with almost half of Australian businesses fearing future struggles with loan repayments and debt.”

One in 10 (10 per cent) of respondents said they will refinance their current loans to get a better deal, and 8 per cent said they would get financing. Alon says, “Looking for the right loan product in the current environment of rising interest rates and a plethora of loan options can be overwhelming for small businesses. Comparison websites are one of the easiest ways is to shop around – particularly ones that specialise in business lending. In addition to interest rates, consider fees, charges and any options that give you flexibility in paying down your loan.”

The full survey results, including breakdowns across ages and States, can be found here: smallbusinessloansaustralia.com/resources/australian-smes-2023.html