Small Business Bear Brunt of COVID-19 Downturn
(29 September 2020 – Australia) As institutional enterprises raised up to A$27 billion in capital to offset balance sheet write-offs exceeding A$32 billion since the onset of COVID-19 restrictions in March 2020, small businesses are left with minimal recourse as the end of government stimulus and loan repayment deferrals loom large.
The provisions estimates were generated by analysis of 2019 financial results by EY, noting CEOs of ASX200 listed institutional enterprises remain optimistic the Australian economy can achieve low growth until 2023. Of the A$32 billion reported in write-downs, EY estimates the majority of equity raisings were undertaken at the outset of the crisis with the highest proportion falling in early Q2 2020.
The COVID-19 pandemic has also been felt closer to home by CEOs. The KPMG global CEO survey of 1300 CEOs supplemented by a second survey of 315 key decision makers in August (including 50 from Australia) found 40 percent reported a member of their extended family had their health affected by COVID-19. 70 percent in Australia and internationally said their personal experience had reshaped their strategy and one in two Australian CEOs and two thirds globally had their salary reduced. The latest KPMG research found talent and supply chain risks have shot up the list of CEOs' top risks while digital strategies had also raced forward by several years.
"Australia CEOs do seem a little more optimistic than their global counterparts. In general, bigger businesses have weathered this ok, I think it's smaller businesses who are struggling and have been hit harder than bigger business. The fact we've had less insolvencies than 12 months ago doesn't seem right. There will be a time of reckoning, it's a question of whether the government can somehow smooth that to assist as many as possible to the other side" stated KPMG Australia CEO Gary Wingrove.
"In our view, companies will now favour raisings for growth rather than survival. If there were to be further raisings to reinforce balance sheets, it is most likely these will occur in the financial services and real estate sectors" commented EY M&A Partner Duncan Hogg.
Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, renewed calls for government to introduce ‘revenue contingent’ loans for SMEs, which businesses would only need to repay once their revenue had strengthened and they had the confidence that they could afford them. A key issue raised is the length of the loan terms - three years for the first instalment and up to five years for the upcoming instalment – with the ASBFEO suggesting that it was also challenged by SMEs concerns over their ability to service the loans.
“I think A$1.7 billion was all that had been lent from that A$40 billion fund, at least that was the case a couple of weeks ago. And the feedback we have had is that businesses simply don’t have the confidence to take those loans because they are just not sure whether they will have the capacity to pay back when they have to. So, they take a loan and they are going to have to start paying their repayments, and they are unsure about that” stated the ASBFEO, Kate Carnell.
“It is also true that the serviceability requirements of the banks are really onerous. The banks are having trouble looking through COVID to assess whether businesses are able, or not, to pay money back over the length of the loan” MS Carnell added.
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