A lot of small business are not going to survive this.
One of the things that I don’t think the budget did enough of – and I think it will be forced to do more of – is support small business.
There was a report yesterday from Judo bank who reckon that 8%, or 160,000 small to medium sized businesses are not going to survive Covid.
That’s a pretty grim stat.
The RBA was singing a similar tune last week in their Financial Stability Review, saying that the road ahead looks tough:
Overall, businesses entered 2020 in good financial shape, but have since experienced sharp falls in revenue. Most have withstood the economic contraction so far, with the support of government initiatives and private lenders. As the downturn persists and the support starts to unwind, however, it is likely that business failures will rise.
Many businesses have faced enormous disruptions to their trading. In aggregate, small business revenue has fallen by 15 per cent since March, with larger declines for businesses operating in Victoria (Graph 2.1).
That’s a pretty brutal story. Average revenue declines of over 15%. And look at how wide-spread it is. I never would have guessed that SMEs in the agricultural sector would see their sales slashed by almost 10%. Hmm. I guess many food producers are tied to the fortunes of the dining industry…
The RBA note that so far, this hasn’t been a huge problem because government support packages have evened out the bumps, and their cashflow positions are holding up. Never-the-less, SMEs are building up cash reserves, preparing for the worst:
Business cash buffers have increased markedly since the start of the year. Before the pandemic, around half of Australian businesses had enough cash on hand to pay their expenses for less than one month (Graph 2.2). By June 2020, more than 40 per cent of businesses reported they had sufficient savings to cover their current expenses for more than six months, partly due to the level of income support. Large corporates appear particularly well placed in terms of cash buffers, having significantly increased their cash holdings during the pandemic, including through reducing expenses and drawing down credit lines.
That said, many businesses are struggling to stay afloat:
At least 10–15 per cent of small businesses in the hardest-hit industries still do not have enough cash on hand to meet their monthly expenses. These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures. Survey evidence indicates that about one-quarter of small businesses currently receiving income support would close if the support measures were removed now, before an improvement in trading conditions.
And inevitably, small businesses are going to close…
Business failures will increase, although there is a high degree of uncertainty about the magnitude and timing. It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19 related disruptions, and the timing and extent of the unwinding of the various support measures. Bankruptcies and insolvencies are currently very low because of the income support, loan repayment deferrals and temporary insolvency relief (Graph 2.4).
So we may be looking at the calm before the storm. So far, businesses are staying afloat. But the real test is going to be when the support packages like JobKeeper et al start to unwind, and SMEs are going to have to fend for themselves.
I’d like to think that we won’t be leaving SMEs to the wolves, and that would mean even more money coming out of the RBA’s bottomless bag of money, but I don’t think it’s a certainty.
It’s one of the tragedies about being small. When Qantas goes belly-up, everyone complains because they own Qantas shares. When your local café closes, it’s never going to make front page news.
So spare a thought for your local businesses. They need your support more than ever.