Paul Dowling
Private businesses ready to borrow again?
 Despite the much-discussed ‘green shoots’ of economic recovery, this sixth Private Business Barometer clearly shows that private businesses in the A$10 million–A$100 million annual turnover range still face an uphill battle in steering through the current economic environment. Nevertheless, a growing number of businesses see the hilltop drawing near and are expecting a smoother ride as the economy leaves the worst of negative growth behind. The average debt ratio, measuring total debt versus total assets, has dropped to just 31.2 per cent in this Private Business Barometer, down considerably from 41.3 per cent recorded in the inaugural publication back in February 2007. This means that for every A$1 million in assets, private businesses owe an average of A$312,000 to banks and other financiers. It is not surprising to see the debt ratio fall further. East’s core work in business banking suggests that raising new debt is considerably more difficult than it has been in recent years, with businesses facing more onerous collateral conditions and stricter lending criteria. Many businesses are also experiencing increases in lending rates, with banks actively repricing their lending books. In this environment, any new borrowings are sought mainly to support daily working capital needs and paying down debt has taken centre stage. But how long can the debt ratio continue to fall? When are private businesses likely to rediscover their once avid appetite for debt? The Private Business Barometer gives some valuable insights into how this will unfold during the coming year. Despite a further slowdown in business growth, this sixth Private Business Barometer finds there are clear signs of optimism re-emerging. This is best illustrated by the fact that private businesses are setting higher growth targets. Plans to invest in the business have revived as many owners and managers anticipate a recovery in 2010. Moreover, virtually all those businesses that are gearing up for the upturn are planning to raise more debt. This all suggests that the debt ratio is unlikely to fall much further. Indeed, the growing investment appetite and returning confidence now mean that a rise in the debt ratio during the next year is a distinct possibility. Are these results therefore signs of an imminent recovery? Perhaps. But it is more likely that there will still be some challenges to overcome in the next year and that a recovery will come at a moderate pace. Weak hiring intentions attest to this. While more businesses are looking to invest, declining hiring intentions imply businesses will also be looking for greater efficiency, rather than simply expanding the scope of operations. In other words, though the eye of the storm may have passed, rebuilding will take some time. As businesses start to look at their blueprints for the recovery, they will require advice and guidance on a range of issues. Relationships with trusted advisers therefore matter more than ever. | | Paul Dowling Principal Analyst East & Partners |