Residential interest rates are very attractive but business lending is more challenging: Mark Bouris

The biggest financial news for most Australians in the past two years has been the falling cash rate and decreasing mortgage rates.

They’ve come down so far that you can get a variable rate mortgage in the low 5% range and some lenders have 2 or 3-year fixed rate mortgages as low as 4.99%.

But it’s been more complex for small and medium sized enterprises (SMEs). The Reserve Bank, in a recent report, said fees paid in household lending fell in 2012 to $4.1 billion, while bank fees in business lending rose 7% to $7.3 billion.

In another survey, banking analysts East & Partners found that 43% of the SMEs surveyed experienced rate rises on their secured loans in the last six months. Just 0.8% had a rate reduction and 56.1% had no change in their rates. The average rate rise was 5.3%.

I support the workings of a free market, but we should be concerned when official interest rates drop to historic lows while businesses have rate rises.

It’s easy to make this a fight between big corporations and small business, or between big banks and the ‘mums and dads’.

But the problem could go deeper. Australia has so many small and medium sized enterprises (SMEs) – 99.7% of all businesses – that making them pay more for debt than other borrowers will eventually hit the general economy.

If a business pays more for secured debt than the going rate, one response is to raise prices to cover costs. If this reaction gains momentum among businesses, inflation rises.

A business may not be able to raise its prices but it can cut overheads such as reducing employees or cutting back hours and overtime. Given that small and medium sized businesses employ 70% of the private sector work force, this affects employment.

Also, small businesses constrained by the cost of debt find it harder to grow, and then we lose a vital offset to the oligopoly power of corporations – an offset that we all profit from in consumer choice, service and prices.

Here’s another problem: when a small business has cut as much fat as it can in the enterprise, then the owners tighten their belts in the family home. It’s a double effect because they don’t just contract as producers – they contract as consumers.

The worrying aspect of this is that while slightly more than half of the East & Partners respondents said their rates hadn’t moved for six months, the RBA has tracked rising bank fees for business lending. Which means net increases for business owners.

Overriding this issue is the traditional reluctance of SME owners to change banks.

So, are businesses being squeezed by their banks with nowhere else to go? Or, is this a time to attend to the basics of business performance and seek out truly competitive lenders?

Which way will Australian business go?

I would love to know what you think. Talk to me on Twitter.