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RBA rate cut welcomed by business lender

RBA rate cut welcomed by business lender

Sydney, December 4, 2012 - The Reserve Bank of Australia (RBA)’s official cut in interest rates will help to underpin greater levels of business investment at a time when the economy needs more activity outside the mining sector, according to Bibby Financial Services Australia.

The RBA today dropped official interest rates to 3.0 per cent from 3.25 per cent. That decision came after official data revealed on Friday a drop in business credit of 0.3 per cent, reversing a rise of 0.3 per cent in September, leaving business credit broadly unchanged since June. This compares to a modest recovery in borrowing by households.

Gary Green, Director of Bibby Financial Services Australia, said borrowing activity by businesses, particularly small and medium-sized businesses (SMEs), has been held back by uncertain economic conditions and a lack of confidence about the future.

“A further cut in official interest rates will help boost business confidence and prompt greater levels of investment in all sectors of the economy, which the Australian economy needs,” Mr Green said.

“The RBA’s credit data suggests that the business sector is struggling and that borrowing costs remain too high. Our own research shows that SMEs fear their customers or suppliers could become insolvent in this uncertain economic environment, as revealed by our own Bibby Barometer Small Business Survey.

“With some SMEs struggling to meet make ends meet in this sluggish economic environment, our recommendation to all SMEs is to increase their focus on cash flow and working capital, particularly with the Christmas holidays almost upon us.”

While business credit for large businesses has recovered modestly since the GFC, business credit growth for small business has been stagnant. The outstanding value of bank loans that are larger than $2 million increased by 10.5 per cent from June 2011 to July 2012 after declining over the previous 2.5 years[1]. However, the outstanding value of loans valued at less than $2 million has remained largely unchanged since 2009.

Mr Green said to smooth out cash flows, SMEs have been taking advantage of debtor financing in recent times.

Over the year to September 2012, there was a 13.9 per cent rise in the level of debtor finance or factoring, while the number of businesses seeking such finance had grown by 3.8 per cent, according to data from the Institute of Factors and Discounters (IFD). In NSW alone, debtor financing jumped by 48.2 per cent from a year earlier.

“This indicates debtor financing is providing new levels of support to Australian businesses,” Mr Green said.

He also noted the increased average size of debtor finance facilities evident from the IFD statistics, suggesting that debtor finance is gaining acceptance amongst increasingly larger SMEs.

Debtor finance allows a business to quickly convert its unpaid invoices into cash, and is in effect a line of credit extended against the business' receivables, which is often one of the largest current assets on the balance sheet.

[1] RBA September 2012 Financial Stability Review.


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