Small business bosses are being forced to use their homes as "piggy banks" to sustain cash flow, pay wages and keep their doors open, analysis of residential property refinancing reveals.
Equity draw-downs from rising residential property values has increased by more than 50 per cent in the past six years as property prices soared and unsecured loans for small business slows, analysis shows.
"Small business is doing it tough and has been doing it tough for a while," said small business ombudsman Kate Carnell about the eight in 10 small business owners with loans secured against their homes.
"Tens of thousands of small businesses are using loans against the equity in their homes to keep their businesses afloat," Ms Carnell said.
Lenders "are not interested" in providing lines loans and lines of credit unless they are secured against real estate rather than cash flows or potential business growth, she said.
Small businesses receive about 80 per cent of their external funding from the big four banks.
Hard to extend the terms
Analysis commissioned by The Australian Financial Review from Digital Finance Analytics shows the number of property owners drawing down equity from their properties to repay other debt has increased from about 3 per cent or 5 per cent since 2012.
Property owners are borrowing more to reduce debt, such as credit card bills or personal loans, the analysis reveals.
But the strategy becomes increasingly tough as property prices flat line or interest rates rise.
Ms Carnell also said many small business borrowers are also finding it difficult to extend the term of their interest-only loans and meet the higher principal and interest repayments.
According to analysis by Canstar, which monitors rates and fees, there is a three-fold difference between the cost of a typical owner-occupied variable house loan and standard credit card charges.
An analysis of $50,000 credit card debt, or loan, reveals a wide range in costs and fees.
For example, a borrower repaying a credit card debt of $50,000 at a rate of about 14 per cent – plus annual fee of $47 – will repay more than $1700 a month and $12,000 in fees and interest over three years.
A $50,000 personal loan, with an average rate of about 12.5 per cent and $147 annual fees, would cost about $1677 a month, or $10,400 over three years plus the principal.
By contrast, a $50,000 line of credit from a $1 million principal and interest loan with a 80 per cent loan to value ratio is about 5.27 per cent and will require monthly payments of about $1500 and total interest of just over $4000 tg have it paid off over three years.
A mortgage top-up would result in just over $300 a month additional costs that is amortised over the life of the loan.
Secured business variable loans for about $250,000 are typically about 6.54 per cent.
Westpac's loan book grows
The Reserve Bank of Australia recently said competition has "been less than vigorous" in SME lending compared to larger companies and "interest rates on small business loans have remained relatively high". The nation's small businesses, which employ about 5 million and account for about one-third of the output of the business sector, have borne the burnt of post financial crisis increases to lending spreads, accord to the RBA.
The banks are sensitive to the criticism that they are squeezing small business, particularly as their treatment of small business is expected to be investigated by the Banking Royal Commission.
For example, Westpac said it approves more than nine-out-of-10 requests from small business lenders and that its $50 billion small business loan book has been expanded by 14 per cent in the past two years and a further $30 billion of lending has been pre-approved.
Ms Carnell said most small businesses, with the exception of real estate and some IT, are struggling with stagnant revenues and rising costs, particularly increased rents in popular locations.
About 2.2 million small business employ fewer than 20 employees and about 40 per cent of owners are earning below the minimum taxable annual wage for $20,500, she said.
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This article was published and provided by the Australian Financial Review.
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