Banjo Loans reports surge in rejections for finance with small business feeling the pain

A growing number of Australian small businesses are facing a cash crunch, with private credit player Banjo Loans reporting a surge in rejections for finance amid soft consumer spending.

Retail and hospitality businesses have slashed their borrowing demands as the sector is gripped by gloomy economic conditions. Picture: NewsWire / Diego Fedele

A growing number of Australian small businesses are facing a cash crunch, with private credit player Banjo Loans reporting a surge in rejections for finance amid ongoing soft consumer spending.

Revealing its latest quarterly update on lending, Banjo Loans boss Guy Callaghan said more borrowers were being knocked back, warning many were attempting to access a financial lifeline when they were already in strife.

Denied applications were up 35 per cent over the September quarter and almost 118 per cent higher than levels faced by borrowers the same time last year.

“People are a bit more desperate, we know that they can’t meet their repayments,” Mr Callaghan said.

These businesses were denied financing as Banjo was concerned it would create bad debts. Mr Callaghan said many small businesses were hurting, with operators holding off making big financial investments amid uncertainty around the economic outlook.

The finance veteran said many had stepped back from borrowing to fund growth, with small businesses now looking to Banjo Loans instead to fund working capital needs as inflation squeezed their costs.

“In a nutshell, SMEs are still hurting, they’re very, very wary of what’s happening in the economy and they’re very rates sensitive,” Mr Callaghan said.

“It’s going to stay that way until there is certainty around rates.”

Banjo Loans CEO Guy Callaghan.

Mr Callaghan said he expected lending levels to remain quiet until at least February as the business community awaited the impact of the holiday season and any indication of a move by the Reserve Bank to cut rates.

The RBA, which has ratcheted rates up from their pandemic lows of 0.1 per cent to current levels of 4.35 per cent, has struck a tough tone amid continued concern about inflation.

Speaking on Tuesday, RBA deputy governor Andrew Hauser said there should be “sceptical scrutiny” of rate projections.

He said the RBA would consider all the data to come out ahead of its next meeting, warning “I genuinely don’t know” where interest rates were heading.

Ratings agency Moody’s reconfirmed the Australian government’s Aaa credit rating late on Wednesday, cautioning the country’s economy “has continued to demonstrate resilience in the wake of multiple shocks” and noting this was expected to continue “into the medium-term”.

“Australia’s growth and employment outcomes have compared well with its Aaa-rated peers and inflation is moving back, albeit incrementally, towards the Reserve Bank’s target range,” Moody’s analysts noted.

Mr Callaghan said many business borrowers were looking to extend the time period of their loans in a bid to ease the heft of their repayments. Banjo Loans recently moved to extend the maximum periods to pay back its loans to 60 months, up from an earlier 36 month limit.

“They get surety around their cash flow and where they can head,” Mr Callaghan said.

He said the move saw applications to Banjo Loans jump 45 per cent on a quarterly basis, but revealed financing applications were still down 8 per cent on where they were last year. Loan values had also jumped, lifting 43 per cent over the September quarter, as companies clamoured for more cash to fund capital needs.

Mr Callaghan said Banjo Loans was also seeing a rising number of small businesses clamouring for cash to fund tax debts or roll existing financing facilities.

“Businesses which aren’t in a position to take on more debt are trying to get it,” he said.

This has led Banjo Loans to pull back on lending to certain industries and customers with a chequered borrowing history.

Borrowers in construction are a concern, with loans to the troubled industry in question amid continued failures in the sector.

Mr Callaghan said manufacturing and hospitality were also seeing a pullback in lending, as the two sectors faced wilting demand.

“Manufacturing, they’re a little bit the canary in the coal mine, they’re more capital intensive and more rates sensitive,” he said.

Mr Callaghan also said retail and hospitality were seeing a borrowing pull back, as the two sectors faced a tougher consumer market. Loans to retail companies have tumbled 42 per cent in the year to September 30.

Mr Callaghan said hospitality customers were cutting back on costs, with many buying cheaper ingredients or reducing the quality of stock on offer to slash costs.

He said smaller customers were now in “survival mode”, noting bigger businesses were still in a position to grow.

NAB’s latest economics insight revealed spending was flatlining, sliding 0.3 per cent in September, with discretionary spending flat and non-discretionary transactions slumping 0.8 per cent.

This is despite continued population growth, with a further 164,000 people added to Australia’s population in March, according to the latest data from the Bureau of Statistics.

NAB reported a 0.4 per cent lift in business credit for the month, and a lift of 6.8 per cent over the 12 months to September.

However, NAB chief economist Alan Oster said the weak retail and hospitality spending figures, contracting 0.6 per cent in September, were warning lights. He said business confidence “isn’t great” noting forward orders from operators were equally poor.

The veteran economist said businesses were also shifting their borrowing demands to working capital. “They don’t look like they’re funding any new plant and equipment,” he said.

Mr Oster said rules from the Australian Prudential Regulation Authority were also driving borrowers into the non-bank sector, with “quite strong” flows into the private credit lenders. This was also pushing bad debts into the unregulated sectors.

NAB reported an 11 basis point rise of non-performing loans in the June quarter, amid a “broadbased deterioration” in its business and private banking lending operation. A further 1.16 per cent of NAB’s book was in default but not impaired.

“It’s almost like APRA requirements have made it difficult for banks to lend, it’s made it more challenging for a bank to satisfy the regulator and also satisfy the client,” Mr Oster said.