One in three SMEs say they won’t survive 6 months into a recession

Alon Rajic, Managing Director at Money Transfer Comparison

As financial experts continue to predict an Australian recession in the next two years, concerning new research has found that 34% of Australian SMEs wouldn’t survive more than 6 months of economic downturn, with 14% unable to survive a recession at all. 

Economists are facing a difficult choice to stabilise the economy, by either increasing interest rates significantly and putting banks and businesses at risk of defaulting on loan repayments or allowing inflation to rapidly increase and reducing consumer confidence and spending.  

Recession or inflation, which one is a bigger threat?

Aussie businesses are also torn whether a recession or rising inflation would be more damaging, as 55% are more concerned with recession, while 45% would be worse-off from continued rising inflation. The findings were derived from a survey of an independent panel of 253 SME owners, commissioned by Small Business Loans Australia, a free comparison website helping Aussie business owners find the best financing and loan options in Australia.

In the survey, Small Business Loans Australia, asked respondents to forecast how long they could survive through a recession. Recessions are normally short and sharp. An example is the 1990 recession, which lasted 14 months. Only 39% of respondents would’ve made it through the previous Australian recession, predicting they could survive 18-24 months.

14% would not survive a recession at all. 20% admitted they would survive less than six months of a recession and 28% predicted they would survive just 6-12 months. Alon Rajic, the founder and managing director of Small Business Loans Australia, said: “The results are concerning. Many businesses have had to endure a tough two years of decreased margins and cashflow, due to operational limitations, lockdowns and lower consumer confidence.”

“As a result, many SMEs are heading into a recession without a savings cushion or plan B. The sector is extremely resilient and my hope is that businesses have learnt from the pandemic to have some safeguards prepared to see the other side of this period,” Rajic said.

How equipped are larger businesses?

Concerningly, larger businesses were least equipped to combat the impacts of a recession. 31% of medium-sized businesses (with 51-200 employees) surveyed said they could not survive more than six months of a recession, compared with 26% of small businesses (with 11-50 employees) and sixteen per cent of micro businesses (with 1-10 employees).

“Recessions affect businesses of all sizes, however, larger firms can have an extra financial buffer to fall back on, as it is normally easier for them to secure financing. It is concerning to see established businesses have a gloomy outlook on their ability to survive a recession.” 

“To minimise the impacts of a potential recession, SMEs should implement preventative financial practises now. Renegotiate vendor agreements and re-examine accounting books to cut costs. If SMEs are paying off business loans and have been affected by increased rate rises, consider consolidating debts and refinancing loans to secure a lower rate,” Rajic said.

“Comparison services make good online research tools, and can help SMEs find an appropriate loan that will allow them to fix lower interest rates,” Rajic further commented.

Despite the majority of small and medium sized businesses suggesting they wouldn’t be able to survive more than a year in a recession, only 55% believed a recession would be worse for their business than rising inflation. Small businesses would feel the effects of a recession the most, with 63% believing an economic downturn would be worse for their business than inflation, followed by 53% of micro businesses and 51% of medium-sized businesses. 

“SMEs are the backbone of the Aussie economy, and it is concerning that they continue to face many external factors, like a recession, that threaten the survival of their businesses.”

“Ultimately, economic downturn is predicted but not guaranteed and targeted gov’t stimulus and investment in population and export growth could pull our SME market safely through this period of uncertainty. Businesses who proactively make changes and put practices and safeguards in place will also be able to survive and thrive beyond this tough period.” 

The full survey results can be found here.