Taking the pulse of business debt in AustraliaFor your fleet
In assessing the general economic outlook for the 2022-2023 financial year, interest rate rises – the cost of borrowing money – and inflationary pressures in the wake of the pandemic were two prominent risks to both the global and Australian economy.
As the year progresses, what do these factors look like now for Australian businesses: What sort of debt are Australian businesses carrying? How are they servicing it? And what does access to funds for Australian businesses look like in the near to medium term?
Global business debt
Growth in debt is a major global financial concern. According to the International Institute of Finance, in May 2022, total global debt was more than $US305 trillion dollars; a $US3.3 trillion increase in the first quarter of 2022 alone.
The main culprit is the Coronavirus pandemic. As well as being an immense public health issue, The World Bank describes COVID-19 as the most significant global economic crisis in more than a century. As they point out, “[This resulted in] major setbacks to growth, increased poverty rates, and widened inequality.”
“In response, governments initiated large and unprecedented emergency support measures, which helped mitigate some of the worst social and economic impacts, and increased sovereign debt levels – already at record highs in many countries before the crisis.”
“The response also exposed several challenges with private debt that now need to be urgently addressed – including a lack of transparency in reporting non-performing loans, delayed management of distressed assets, and tighter or no access to credit for the most vulnerable households and businesses.”
The World Bank’s statement is clear: the conditions that led to the global financial crisis of 2008 are once again present. For businesses – especially those in emerging economies like China, India, Brazil, and Russia – access to vital lines of credit for investing in projects designed to deliver growth will inevitably become more difficult, increasing the likelihood of a global recession.
Business debt in Australia
The Economist notes Australia’s public debt at US$401 billion dollars or $16,765 per person.
According to figures compiled by World Population Review, Australia ranks 104th out of 189 countries measured for its debt to GDP ratio (how much a country owes against how much it produces) of 46.8 percent. For comparison, Japan heads the list with 236.14%, followed by Venezuela with a ratio of 232.79%. America sits in 13th place (108.8%), France (97.41%) 18th, and the United Kingdom in 33rd place with an 83.85% ratio.
Pertaining to the Australian situation, the RBA’s Financial Stability Review paper released in April of 2022 hints at cautious optimism:
“Household and business balance sheets have in aggregate strengthened over the past six months, aided by the resilience of the Australian economy to further waves of COVID-19. Business revenue has increased, and household incomes have been supported by strong employment growth as [government financial] assistance has tapered off.”
This isn’t to say that there are many households and businesses who will face challenges. As the RBA observes, “A small share of borrowers remain vulnerable to declines in their cash flows. For households, this includes those that are both highly indebted and have low excess payment buffers to draw on if required. For businesses, it is those with relatively low cash buffers, and those facing ongoing weak revenue growth and/or rising cost pressures.”
“Increases in interest rates – which are anticipated by market participants over the next couple of years – would result in higher debt repayments for many households and businesses, but most are well placed to absorb these. However, there are some risks around borrowers’ capacity to pay if rising inflation is not accompanied by faster household income growth and rising business profitability.”
The takeaway for businesses is the need to remain more careful than ever with their money. Organisations will need to remain mindful of debt levels and be careful not to increase them in an environment of global uncertainty given the strong likelihood of continued interest rate rises.
It’s important to know the nature of the debt of your organisation. As any accountant will tell you, there’s good debt — debt which can be serviced without putting stress on your finances and will ultimately lead to a capital gain or improve your financial position – and then there’s bad debt. The collapse of property developers and home construction companies, like Metricon and Probuild, could be seen as an example of a bad debt or, to use a better turn of phrase, a risky debt strategy.
While COVID-19 shutdowns, labour shortages and increases in the cost of materials have seriously impacted the industry, the prevalence of developers entering into fixed-price contracts with thin margins has arguably turned home-building into loss-making ventures. Costs increase, profits evaporate and the lending risk profile for property developers has made it extremely difficult for them to access credit to complete projects.
Accordingly, many councils are noting a decline in new building approvals. The June 2022 figures show a 19 percent drop in approvals compared to the same time last year – a 17.2 percent drop seasonally adjusted – suggesting caution in one of the economy’s most important performance indicators.
Leasing as a business strategy
One of the most fundamental priorities for all businesses is to minimise their level of debt – especially when the cost of funding is increasing – and ensure the business can service whatever debts it possesses. It’s also important to make sure your organisation can access lines of capital to keep your business operating, and to use it to invest for growth.
A method for assuring lines of capital, and investing where you need to, is to make sure you haven’t got depreciating money sitting in motor vehicles. In this way, leasing reduces depreciation and can ease cashflow pressures. Let someone else shoulder the risk on that debt and utilise a smarter business strategy.
Talk to SG Fleet to learn how vehicle leasing can be a sensible debt minimisation strategy for your business.