The cost of everyday life is getting more expensive for Australians. The costs of food, housing, transportation, and more have increased in nearly every city. The unexpected side effect? Consumer expense increases, reflected in rising Consumer Price Index (CPI) data across Australian cities, are directly impacting business borrowing capacity in ways many entrepreneurs don’t fully understand.
Martin Iglesias, a Credit Analyst at Highfield Private, has witnessed this trend firsthand throughout his two-decade career in corporate finance. His insights reveal a critical connection between household cost pressures and business funding limitations that could reshape how Australian SMEs approach expansion planning.
Hidden Impact: Consumer Expense Increases in Australian Cities Reduce Business Borrowing Capacity
Recent CPI data from the Australian Bureau of Statistics shows concerning trends across major cities:
- Perth: 2.7% annual increase
- Brisbane: 2.5% annual increase
- Melbourne: 2.0% annual increase
- Sydney: 1.9% annual increase
- Adelaide: 1.8% annual increase
- Hobart: 1.7% annual increase
- Darwin: 1.6% annual increase
- Canberra: 1.6% annual increase
- Weighted average across eight capital cities: 2.1%
Perth leads with a 2.7% annual increase, followed by Brisbane at 2.5%, while the weighted average across eight capital cities sits at 2.1%. These figures represent more than statistical abstractions—they translate into real constraints on business funding.
“These cost-of-living rises are being factored in by the banks on their assessments,” Iglesias explains. “They check the household’s monthly expenditure, and it’s gone up by nearly $1,000 recently. That’s cutting back or curtailing the borrowing capacity for customers, and it offsets the rate reductions when you’re looking at their borrowing capacity for servicing, because the cost of living is higher than what they’re saving on interest rate reductions.”
When inflation erodes household buying power, central banks maintain higher interest rates to combat price pressures. Combined with banks factoring higher living costs into their serviceability assessments, businesses face a double constraint: higher borrowing costs and reduced borrowing capacity.
The result is that businesses can’t secure adequate funding unless they’ve taken proactive measures to optimise their finances and demonstrate strong serviceability before applying. This assessment process reflects a fundamental shift in how lenders evaluate risk. Banks don’t simply look at business cash flow in isolation—they examine the complete financial picture of business owners, including their personal living expenses.
Economic Growth May Delay Further Rate Cuts
Despite increasing living expenses and high interest rates, Australia has shown relatively strong economic growth recently.
The relationship between economic indicators and borrowing capacity creates counterintuitive outcomes. Strong economic growth, typically viewed as positive, can actually work against businesses seeking financing.
“The rate of economic growth has been quite strong in Australia, and that’s going to mean delays in further interest rate cuts,” Iglesias says. “The market actually took a dive on the back of good economic news, because markets want to see rates going down further.”
This dynamic illustrates the complex web of factors influencing business lending. While robust economic performance suggests business opportunities, it also signals to the Reserve Bank of Australia that monetary policy tightening may be necessary, ultimately affecting borrowing costs and availability.
The Double Squeeze: How Rising Costs Create Funding Gaps for Australian SMEs
These relationships between increased cost of living and high interest rates create particular challenges for the SME sector, which forms the backbone of the Australian economy. Businesses that might previously have qualified for expansion funding now find themselves constrained by factors beyond their operational performance.
The implications extend beyond immediate funding decisions. Iglesias has observed that “oftentimes these SMEs will have one or two really big clients, and should they lose one, they’re in pretty dire straits because they don’t really have a wide spread of customers.” When combined with reduced borrowing capacity due to living cost pressures, this concentration risk becomes even more pronounced.
Building Resilience Against Funding Constraints
Smart business owners are adopting several strategies to navigate these challenging conditions:
Diversify Revenue Streams Early: Rather than relying on one or two major clients, successful SMEs are actively pursuing smaller, diverse customer bases. This reduces concentration risk and demonstrates to lenders that the business isn’t vulnerable to a single client departure.
Strengthen Personal Financial Position: Since banks assess personal expenses alongside business performance, business owners should focus on managing household debt and controlling discretionary spending. Paying down personal credit cards and avoiding unnecessary personal loans can directly improve business borrowing capacity.
Implement Robust Cash Flow Management: Iglesias emphasises the importance of avoiding the trap where businesses “end up in arrears with tax because they haven’t acted on these working capital outlays, and they rely on the tax office as a lender of last resort.” Maintaining current tax obligations and building cash reserves becomes crucial when borrowing capacity is constrained.
Prepare Documentation Proactively: Businesses should maintain comprehensive financial records and cash flow projections before approaching lenders. “They need to have their funding thought out before they approach and get these contracts or tender for these contracts,” Iglesias advises.
Consider Alternative Funding Sources: While more expensive, alternative lenders offer higher loan-to-value ratios and more flexible assessment criteria. Businesses should factor these higher costs into their return-on-investment calculations and consider them as bridge funding while working to qualify for cheaper bank finance.
Preparing for the New Lending Environment
Successful businesses are adapting their approach to reflect these new realities. Iglesias emphasises the importance of proactive financial planning: “They need to have their funding thought out before they approach and get these contracts or tender for these contracts.”
This preparation becomes even more critical when personal expense increases are factored into lending equations. Business owners must now consider their complete financial footprint when planning expansion or major contracts.
The rise of alternative lenders offers some relief from these constraints. “The biggest opportunities would be because you can access a wide range of alternative lenders, and they get higher loan-to-value ratios,” Iglesias explains. However, this flexibility comes at a cost—alternative lenders typically charge higher interest rates than major banks.
Businesses Can Be Proactive & Navigate Uncertainty
As Australia’s economic landscape continues evolving, businesses must develop more sophisticated approaches to funding strategy. The interconnection between consumer expenses, monetary policy, and business lending creates a complex environment requiring expert navigation.
Martin Iglesias’s experience across different market cycles provides a valuable perspective for businesses facing these challenges. His track record includes facilitating the growth of an online retailer from a medium-sized operation to a $250 million enterprise, demonstrating the potential for success even in complex funding environments.
For Australian businesses, the message is clear: success in today’s lending environment requires understanding the broader economic forces at play. Consumer expense increases aren’t just statistics—they’re factors that directly impact business funding capacity and strategic options.
The businesses that thrive will be those that recognise these interconnections and plan accordingly, working with experienced finance professionals who understand both the technical requirements of lending and the personal dynamics that influence funding decisions.