Australia’s big businesses enjoy better rate reductions than smaller firms: analysis

Australia 457 visa changes — The Australian Government recently announced plans to do away with the 457 visa program. Esaias Tan via Unsplash

Businesses in Australia get to save billions of dollars in interest on loans per year. Big businesses are enjoying an annual savings of $27.6 billion, which is about three times the savings of smaller firms.

Small businesses are notably reaping the benefits of interest rate cuts as they are now paying $9 billion less compared to the same time in 2011.That’s according to Australian Bankers' Association’s analysis of Reserve Bank data. Small business having to shoulder less interest on their loans will help push economic growth, generate new jobs and tackle unemployment in Australia.

Australian Bankers' Association chief economist Tony Pearson said the average interest rate paid on all current loans held by small businesses has dropped in the past six years. It is now at 5.30 percent, which is comparable to 8.40 percent in 2011.

That means Australia’s small businesses have seen a 3.1-percentage-point drop in the average interest rate over the last six years. Interest rates for small firms have dropped to the lowest levels since data started to be collected on the amount SMEs pay for finance.

While small businesses are clearly getting relief, interest rate cuts are even more favouring bigger businesses. According to the association, the average interest rate for bigger businesses has dropped to 3.40 percent from 7.10 percent over the past six years. That is equal to 3.7 percentage points.

UNSW Business School’s Richard Holden said the bigger cut in interest rates for big business loans comes down to market forces. It is a 37 percent rate cut for smaller businesses while a 52 percent reduction for bigger firms.

Holden said those rates are a reflection of a market view that big business loans have become less risky than small businesses loans. "This could be for a variety of reasons to do with industry mix, international competition and regulatory factors,” The ABC reported him as saying. He added lower rates typically help small businesses more since it is harder for them to get capital.

Standard variable rates for business loans which are not secured by residential property are advertised as higher compared to those secured by residential property for some of the country’s banks. IPA chief executive Andrew Conway said there is a strong case for implementing a loan guarantee program to help solve the issues that smaller and younger start-ups unable to finance new investment opportunities via normal commercial channels are facing, SmartCompany reports.