The Great SME Divide: Why Your Borrowing Strategy Matters More Than the Loan Itself

As easing monetary policy and improved business conditions spark a 3% rise in commercial credit demand, Australian SMEs stand at a crossroads. While the macro environment is warming up, the landscape is far from uniform.

For business owners considering finance, the difference between success and stagnation isn't just about getting approved—it is about having a strategy before you apply.

A Tale of Two Economies

The latest data reveals a "deep divide" in the SME sector. On one side, nearly 60% of SMEs project record double-digit revenue growth. On the other, 25% of businesses are in outright contraction.#

This polarisation means a "business as usual" approach to lending is risky. Your borrowing strategy must align with your specific reality:

• The Growth Seekers: Businesses in Queensland, WA, and SA are leading the charge with strong increases in credit demand.

• The Strugglers: Conversely, Victorian SMEs are still seeing demand contract, and sectors like retail and transport continue to face rising insolvency levels.

Don't borrow just to plug a hole. If you are in a growth corridor, borrow to expand. If you are in a contracting sector, seek advice on working capital and restructuring to stabilise cash flow.

The Trap of "Self-Funding" vs. Strategic Capital

A staggering 90% of SMEs still rely heavily on their own funds or family finance to back new investments. While this feels safe, it risks constraining your long-term ambitions and agility.

Smart borrowers are diversifying. We are seeing a massive shift away from traditional banks, with 55% of SMEs now intending to use non-bank lenders for new investments—double the number relying on banks.#

Why this matters: Relying solely on retained earnings can leave you vulnerable when costs rise. With wage inflation and energy bills soaring, keeping your cash reserves as a buffer and using external finance for growth is often the more resilient strategy.

The Planning Gap: What You Don't Know Can Hurt You

Applying for finance without a holistic business plan leaves you exposed to blind spots. Recent data highlights three critical areas where SMEs are failing to plan:

• Tax Awareness: Only 45% of small SMEs know about the extension of the $20,000 Instant Asset Write-Off, and many are unaware that ATO debt interest is no longer tax-deductible.#

• Disaster Resilience: Despite frequent national shocks, 26% of SMEs have not sought any advice on disaster preparation.#

• Productivity: Reactive cost-cutting, like freezing recruitment (adopted by 72% of SMEs), may solve a short-term cash problem but severely hampers long-term productivity.#

Plan First, Borrow Second

The market is showing signs of relief, with insolvency rates dropping for the first time since 2021. However, the productivity gap between SMEs and large firms remains at 50%. Closing that gap requires capital, but more importantly, it requires foresight.#

Before you submit that application:

1. Audit Your Position: Are you borrowing for growth (asset finance, expansion) or stability (working capital)? Know the difference.

2. Look Beyond the Bank: Explore the non-bank sector, which now funds the majority of SME investment.

3. Protect Your Cash: Don't drain your personal funds; use external capital to maintain liquidity.

4. Consult the Experts: Talk to a broker or adviser about tax implications and disaster contingencies.

Don't let a lack of planning turn a financial opportunity into a liability. Build your strategy today to ensure you are on the winning side of the growth divide. Book your free financial health check to audit your position here

#Research sources Equifax - Commercial Credit Demand Rises Driven by Easing Monetary Policy - Insolvency Rate Drops Despite Challenges in Some Sectors

ScotPac - SME Growth Index