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The year 2020 was hard on small businesses worldwide. Australia fared much better than many countries. However, the damage to SMEs was huge and many of them closed with many more at risk of doing so in 2021. The biggest problem for small businesses that came from the COVID-19 pandemic is cash flow issues. Those could have been mitigated by loans, but those are in short supply as well now. Therefore, it’s very hard to say how the economic recovery of Australia will progress in 2021. There are some promising developments, but the situation is highly complex.

Impact of the COVID-19 Pandemic on Australian Small Business in 2020

The coronavirus pandemic of 2020 is a global crisis that is also unprecedented. Therefore, its full impact cannot be forecasted. The impact of this global economic crisis is compared to that of the Great Depression and recession after World War 2. However, the truth is that the world is quite different today and we have yet to see the full impact of this situation.

However, now in 2021, we can see that for all the trials of 2020, the Australian small business sector didn’t break under the challenge. Small businesses are the most affected group in this crisis because they frequently experience cash flow issues. In fact, the majority of small businesses run “paycheck-to-paycheck”. Therefore, lockdowns and forced halt on international trade should have devastated the sector.

The only reason why this hasn’t happened is the government’s relief and financial support programs. These programs offered different types of assistance, which allowed many small businesses to get through the lockdown periods.

Moreover, many SMEs were able to adjust to the situation somewhat by modifying their business models. The most common of these changes were the mode of offering products/services, operating hours, staff duties, and range of offered products/services. These changes helped SMEs to keep working even in this difficult time. However, neither the adjustment nort financial support from the government is able to erase the negative impact of the pandemic.

The simple truth of the matter is that small businesses require constant cash flow in order to function. If they are unable to get it from doing business, they need financing to tide them over until profitable trade is restored. However, financing is currently in very short supply due to the same pandemic. Even alternative lenders have mostly stopped loan origination due to the lack of funds or extreme risks.

Shortage of Business Financing and Other Consequences of the Global Economic Recession

The consequences of this crisis are not yet fully realized. But already it’s clear that the number of SME closures will keep climbing. There is no avoiding it because the crisis triggered several debilitating changes in consumer behaviour.

  • Increased payment times.
    Whereas the average payment time after it’s due in October 2019 was 13.4 days, in 2020 this number turned into 30.1 days. In some industries, like the transportation, it’s reaching over 90 days.
  • Reduced purchases.
    The overall rate of purchases in every industry has decreased and it’s not clear when it will get back to the pre-pandemic level. Experts state that this economic recession will last for a long time. Therefore, this situation isn’t going to improve soon.
  • Unemployment.
    Recent reports state that the unemployment rate in Australia hasn’t dipped too low and many people regained their jobs after the lockdowns were lifted. However, this situation is still precarious and with the rising number of SME closures the unemployment rate will continue to climb. This will further reduce the consumers’ purchasing ability.
  • Reduction in business financing.
    One of the biggest problems triggered by the crisis is a severe reduction in financing opportunities. Small businesses always have a harder time getting loans from banks. However, now it’s almost completely impossible for SMEs to get traditional financing. Unfortunately, alternative lenders are no help because the majority of them are also deeply affected by the crisis. Therefore, they stopped loan origination almost completely. The result is that small businesses have no solution that could help them with cash flow issues. This is why a great many SMEs will have to close in the near future.

Government Grants and Financing Programs for Small Business Support

Small business grants and a variety of debt relief and financing support programs are essential for the survival of Australian SMEs in the current crisis.  The government of Australia, along with the governments of each individual territory are doing their best to provide financial relief where it is most needed. This is helping the small business situation a great deal. The results of these programs have improved further when online lenders joined them.

This was a turning point for the industry as a whole because alternative lenders were close to out of business due to the COVID-19 pandemic and restrictions it brought. They remained active, especially in big cities. Therefore, one could still find small business loans in Sydney and Melbourne with relative ease.

However, the situation changed rapidly as fintech lenders started to run out of money. Without the capital, they were literally unable to offer loans. This is where government funding programs became a solution. These lenders are oriented to work with small businesses and sole traders as a matter of priority. Therefore, they were able to deliver government-backed financing to these recipients more effectively than large banks. Leading online lenders in Australia, including Capify, Prospa, and GetCapital all offer financing under the SME Loan Guarantee Scheme.

That said, small business owners and sole traders need to remember that government assistance is greatly varied. Therefore, you should research all options of financial assistance available within your region. You might be eligible for several types of aid that will help strengthen your business in 2021.

These grants and assistance programs can make a big difference for the Australian economy. That’s why improving their accessibility is essential. Dispersing this financing through alternative business lenders is one of the most promising strategies.

COVID-19 Pandemic Repercussions for Online Lenders in 2020

The COVID-19 pandemic was hard not only on enterprises but also financing providers. Alternative lenders, in particular, suffered a great hit from the pandemic. Some of them, like 255 Finance, are not able to recover from this crisis. However, there are some companies that fared admirably and were able to maintain loan origination through lockdowns.

It’s important to note that the coronavirus crisis of 2020 was the first true global challenge that the online lending industry faced. These businesses have been around for a while but they made the real breakthrough after the great recession of 2008. At that time, banks and other traditional lenders were very reluctant to offer loans to small businesses and entrepreneurs. Therefore, online lenders filled out the niche.

Due to the specifics of their business, these financing providers have a greater number of high-risk borrowers. And that’s exactly why the entire industry is now facing a reckoning. With so many borrowers defaulting on their loans and not enough cash, loan origination from online lenders has been cut entirely.

These businesses simply do not have the money to lend. Therefore, they are failing alongside millions of small businesses worldwide and in Australia in particular.

That said, alternative lenders that have sufficient capital to actually stay active are doing very well despite the period of limited inactivity. For example, Prospa, one of the leading online lenders in Australia, has nearly stopped loan originations by the middle of 2020. However, this number has gone up by 26% in the last quarter of 2020. Over the last three months of 2020 the fintech loaned $100.7 million to SMEs.

However, while this is a huge improvement over the third quarter of 2020, it’s still over 40% below the pre-pandemic levels.

Small Business Recovery Forecasts for 2021

For now, there are not many optimistic forecasts for the Australian small business. The situation isn’t desperate yet as technology helps many SMEs adjust to the new reality. However, the recovery after this pandemic crisis will take a lot of time. Not everyone will make it through.

In fact, it might be a more expedient route for many current business owners to close up their companies and create something new. It’s also a good idea to establish new partnerships that will have a better chance of success.

At the moment, attracting investors to innovative business models and ideas seems to be the most efficient way to survive. That’s the route that online lenders are taking as only those with new investors are currently able to function. But they now can offer funding to small business owners that are desperate for a chance.

The economic forecast might be grim, but the 2020 crisis has also become an opportunity. It forced the technological revolution that has been brewing for a while. It’s true that in 2021 many more businesses will fail. However, it’s also true that they will leave space for others to take.

The change in consumer needs and behaviour prompted the need to evolve your business. This means that the market will undergo severe changes soon as well, which presents you with an opportunity. The trick is to adjust to these new realities to grab your chance. This won’t be easy, especially considering that the buying rate will stay down for a while. There is also the issue of the global economic crisis. It’s impossible to say what kind of developments it will trigger in the coming years.

However, it’s already clear that business owners oriented toward innovation and those who use cutting edge data analytics will have the best chance of success.

Will the Lending Situation Improve for Australian SMEs in 2021?

The situation within the online lending sector is definitely improving. It’s not only Prospa that is showing an increase in loan originations. Capify, another top online business lender in Australia, has recently announced a successful $14 million equity round with the continued support from Goldman Sachs Merchant Banking Division. This means that the fintech will be able to finance quite a large number of Australian small businesses that are struggling due to the recession.

Moreover, this also means that investors have faith in online lenders like Capify. And with investor capital, these businesses will be faster to recover, which means they will fuel the small business sector.

This continued trust from investors is a clear indicator that the fintech business model works. It’s true that quite a few online lenders won’t make it. But those that will continue to offer loans after the crisis passes will be changed and much more resilient to future crises. Also, they will be able to become true contenders for banks and other traditional financing providers. This will definitely shake up the banking industry by introducing a higher level of competition.

However, those are things that will happen in the future. For now, the recovery of online lenders is very slow. One also shouldn’t forget that it’s only lenders backed by a new round of funding from reputable investors that are making a comeback. The majority of alternative financing providers are still unable to offer loan origination.

In fact, their situation is getting progressively worse as borrowers do not keep up with their payments. Those fintechs that haven’t collapsed yet, might do so in 2021 without a steady stream of loan payments. This means that the industry, as a whole, will remain volatile for a while.

Bottom Line: Global Economic Recession Will Keep Claiming More Victims

The recession happening now has only started and it’s clear that it will last for a while. This means that many small businesses will fail in 2021 and possibly beyond.

That said, this situation also offers you a chance for businesses to climb to the top if they offer products and services better suited to the current situation. The issue is that the majority of SMEs require financing to achieve this. Therefore, the alternative lending industry has become even more important in 2021.

Right now, the lending situation is poor as many companies have stopped loan origination. It’s slowly improving, but the question is whether this will be enough? Without loans small businesses might collapse in much greater numbers, which will make it extremely difficult for the economy to recover at all.

Written by: Galyna Bulatseskul – accountantsdaily