The effect of banks tightening the purse strings on small to medium enterprises could seriously hamper the Australian economy in the long term, East & Partners' latest SME Banking Markets Report reveals.
The six monthly survey found the proportion of SMEs that plan to borrow money from banks over the next six months has dropped from 77.1 per cent to 65 per cent in just six months.
East & Partners' financial markets analyst, Peter Drennan, said SMEs just simply don't know if they can borrow in the current economic climate.
The reduction in planned borrowing comes mainly from small business uncertainty. The percentage of SMEs that are unsure if they will borrow in the next six months nearly doubled since April 2008 to 21.7 per cent of all SMEs.
The result of this market uncertainty could be significant for the Australian economy in the long term.
The lack of business lending in the market has curbed a number of long term investment strategies by small businesses. Development projects, capital expenditure and business acquisition are among the causalities.
"Businesses are instead focusing on extra working capital in order to keep up the growth rates that they have experienced during recent high growth years," Mr Drennan said.
In October 2008, 82.2 per cent of SMEs that plan to lend will do so for working capital to fund growth.
Recent developments in Australia, however, could turn around the potential growth in the small business lending market. Developments range from a dive in interest rates and added Government support to market consolidation.
"Recent interest rate falls will fuel even greater demand for business lending, which creates a significant opportunity for banks looking for extra revenue," Mr Drennan said.
At the Small Business Summit held in Brisbane last month, the fovernment also gained assurance from banks about the availability of finance to small business.
"Also, St George and BankWest can be more confident in lending to SMEs, with the AA credit ratings of their soon-to-be parent companies in Westpac and CBA respectively," Mr Drennan added.
