SME directors willing to borrow from businesses to solve financial troubles

Alon Rajic, Founder and Managing Director of Small Business Loans Australia

As 2023 brings with it risks of a recession and higher interest rates, research reveals that business directors will have no hesitation in borrowing from their businesses or personal finances to survive, despite the potential risks to their financial security. Over half (56%) of SME owners either have, or would, borrow funds from their businesses to solve personal financial issues, while 3 in 4 (72%) would support their businesses using personal savings.

The findings were derived from a survey of an independent panel of 210 Australian SME business owners and decision makers, commissioned by Small Business Loans Australia, a comparison website helping business owners find the best loan options in Australia.

What were the findings of the survey?

The respondent pool comprised 44% of micro businesses (1-10 employees), 27% of small businesses (11-50 employees), 18% of medium-sized businesses (51-200 employees) and 11% of large businesses (over 200 employees). The full survey results can be found here.

Alon Rajic, Founder and Managing Director of Small Business Loans Australia, said: “If business owners are needing financial assistance, taking out a secured or unsecured business loan is another option, and is less likely to risk a director’s personal assets. To get the best interest rates or to avoid defaulting, businesses should conduct thorough research into their loan serviceability capabilities in the medium term and the many loan options available.”

Aussie businesses offering distributable surpluses as loans

Businesses can loan ‘distributable surpluses’ (after-tax profits) to their directors in the form of a ‘director’s loan’, which requires formal approval by shareholders and a loan agreement detailing the amount, repayment structure and the tax office’s benchmark interest rate.

Funds withdrawn from the company without such a structure should be regarded as income, with tax implications. On the other hand, there are no tax implications nor are formal arrangements needed to loan personal funds to a business in need. However, this move can come with enormous risks, particularly if those funds are tied to personal assets.

The survey found that over half (56%) of business owners either already have or would in the future, take money out of their businesses to solve personal financial problems. About 26% have borrowed from their businesses and 30% would borrow in the future if needed.

Business loan landscape across Australia

A higher proportion of small businesses (74%) have, or would, borrow from their businesses, compared with 52% of medium-sized businesses and 50% of micro businesses. When comparing responses across the major States, Small Business Loans Australia found that more Victorian businesses (66%) have, or would, borrow from their businesses.

This is followed by 62% of West Australian businesses, 54% of NSW and an equal 47% of Queensland and South Australian businesses. Small Business Loans Australia also sought to discover whether directors would use their personal assets to support their business through tough financial periods, and found that 72% of directors would. Businesses could nominate from the following sources of finance they would draw on to aid their businesses, if needed:

  • Equity from their property (by refinancing their mortgages)
  • Personal cash savings
  • Personal loan
  • Selling a car or other high-value personal item
  • Other.

Thirty-four per cent of respondents would draw from their personal cash savings, while 19% would draw equity from their property or take out a personal loan. Eight per cent would use ‘other’ personal finances, and six per cent would sell their car or another high-value item.

Across the major States, more Victorian businesses (82%) are prepared to use their personal finances to save their businesses, followed by 80% of South Australians, 70% of NSW directors, 67% of West Australians, and 62 per cent of Queenslanders.

Across businesses of different sizes, a higher proportion of small businesses (82% of businesses surveyed) would support their business with personal finances in some way, followed by 70% of micro businesses and 66% of medium-sized businesses surveyed. This financial risk for small businesses comes despite larger businesses generally surviving longer.