31.5.17 – The 2017 Australian Business Lending Landscape
The fact that the Australian business lending landscape is expected to change as 2017 plays out should come as a surprise to nobody. Lending as a concept is incredibly fluid, and small changes here or there can snowball into much larger adjustments that affect the majority of businesses across the country.
Understanding exactly how the landscape is expected to change, however, is something that will make sure you have the actionable information you need to make the right decisions today. Remember that you can’t necessarily avoid change, but you can mitigate certain risks that come along with it by taking the time to learn as much as possible.
What’s Happening with Australian Interest Rates?
Any discussion of changes to the lending landscape would be incomplete without addressing perhaps the most important topic of all: interest rates. Currently, official rates in Australia are at record lows of just 1.5% — continuing a long pattern that began as far back as the 1990s. Based on this alone, it is likely that interest rates will rise in the not-too-distant future. They are much more likely to return to a “normal” level than they are to stay at the extreme lows they are now.
Other signs across the economy also point to an upcoming interest rate increase. Fixed interest rates at major banks have recently increased — an indicator that banks anticipate interest rates being higher than they are now at the end of the current variable-rate periods that most people take.
What You Need to Know about Payment Terms
Another shift to the business lending landscape that can be expected to play out across Australia in 2017 has to do with companies changing payment terms in an effort to both free up cash and improve working capital. Woolworths is just one example of this idea in action, having recently stretched out payments to the majority of its food and grocery suppliers to a full 60 days. Not only is this a significant shift from the existing system of 30-day terms, but it’s also two to three times the payment terms at companies like Coles.
Cash Flow Pressures
Cash flow will always be one of the most significant challenges faced by businesses, and 2017 seems to be no exception. This is spawned by a recent report released by American Express that showed that mid-sized Australian businesses in particular owe roughly $8 billion in outstanding payments to suppliers across the country, with over $2 billion in funds having reached overdue status.
Additional research revealed that most companies doing between $2 million and $3 million in business per year are unable to reconcile about 30% of their supplier invoices at least every other month. This points to an ongoing situation where cash flow struggles are very likely to impact a company’s ability to pay suppliers on time moving forward.
Financing Future Growth
Not all news about the state of lending in Australia in 2017 is necessarily bad. Recent economic data suggests that the Australian economy is actually improving from a long-term perspective. While individual states and territories had a decidedly mixed performance as of February 2017 in areas like business and household activity (along with the housing market, trade, the labour market, and more), in a macro sense, things are growing at an above-trend pace in many areas. This will ultimately make it easier to finance future growth for many organisations.
However, if part of your plan for that long-term growth involved interest-only loans, you may want to come up with an alternative strategy. In a message written to all banks last March, the Australian Prudential Regulatory Authority said that financial institutions should begin to tighten their lending practices when it came to interest-only and investor loans. A large part of this decision is due to an attempt to curb a heightened level of risk in the housing market, but it’s easy to see how this will have a ripple effect across the entire economy.
Under the proposed new rules, banks would need to limit the flow of new interest-only lending opportunities to 30% of all total new residential mortgages — a quota that all four major banks in Australia are currently well over.
Changing Conditions in the Australian Economy
Changing conditions in the Australian business lending landscape and in the economy in general are certainly nothing new — but that doesn’t mean they should be ignored. Failure to account for the future when making decisions today could lead to significant struggles, along with the type of short-term cash flow issues that cause most businesses to close their doors prematurely. If anything, all of this serves to underline the importance of knowing which options are available to you and to be willing to experiment with solutions like invoice financing to help address both your current and upcoming needs.