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Banking industry

Bank/Small Business Relations: A Mixed Bag of Perceptions and Reality

Strategic Insights

— 1 min read

The Reserve Bank of Australia has released statistical information on lending to small businesses, providing a detailed picture of the state of bank/small business relations. This comes as a result of two surveys of small and medium-sized businesses in metropolitan areas and primary production on the mainland. The surveys highlight the complexities and paradoxes in the relationship between banks and small businesses, where attitudes and experiences often contradict each other. While perceptions abound about banks being reluctant to lend or setting too stringent conditions, the actual experience of credit refusals appears to be relatively low, with only 7% of surveyed businesses experiencing a bank refusal to lend in 1992-93.

Key Takeaways:

  • The average interest rate for bank overdrafts charged to Australian small businesses is 10.9%, with higher rates for overdrafts under $100,000 (11.1%) and between $100,000 and $500,000 (10.7%).
  • Small businesses are concerned about bank security requirements, with 73% identifying excessive security demands as an area of dissatisfaction.
  • Unsecured lending based on cash flow is a difficult concept for banks to apply, especially for new businesses without a track record, leading to a presumed need for security.
  • The proportion of small businesses experiencing a credit refusal appears to be small, with only 7% of surveyed businesses experiencing a bank refusal to lend in 1992-93.
  • Fees are a significant concern for small businesses, with 62% complaining about unreasonable fees, while the level of interest rates is not a major area of dissatisfaction.
  • The Reserve Bank's survey notes that the issue of security for loans is a long-standing source of tension between small-business customers and their banks.

Statistics:

  • 78% of metropolitan businesses identify honesty and trustworthiness as the most positive quality of the banking system.
  • 1620 small businesses were covered in the primary production surveys.
  • 1380 small businesses were covered in the metropolitan surveys.
  • 7% of surveyed businesses experienced a bank refusal to lend in 1992-93.
  • 62% of businesses complained about unreasonable fees.
  • 29% of small businesses use bill finance, compared to 62% of larger businesses.
  • Overdrafts represent a more expensive form of credit than bill finance.

Sources:

  • Reserve Bank of Australia (no date, circa 1994)
  • Reserve Bank of Australia (no date, circa 1994)

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