Balancing reward and risk: Should SMEs expand or hold back in tough economic times?
As Australia’s economy continues to slow, with GDP growth at just 0.2 per cent for the June quarter, small and medium-sized enterprises (SMEs) are facing the critical question: Should they expand or hold back?
Banjo Loans CEO Guy Callaghan (pictured) believes that while the risks are real, the rewards of expanding during tough economic times can be significant – if done wisely.
“When the economy is challenging, it’s tempting for businesses to wait things out. But the right businesses, with the right strategies, can find themselves in a stronger position than their competitors if they’re willing to take measured risks,” Callaghan said.
The Rewards: Why Expansion Could Pay Off
1. Capturing Market Share: During economic downturns, many competitors pull back, creating an opportunity for SMEs willing to take strategic risks. Expanding during these times can allow businesses to capture market share that may not be available in better conditions.
“Right now, a lot of businesses are playing it safe, and that opens the door for those willing to take the plunge. If you can expand responsibly when others are holding back, there’s a real chance to grow your market share,” Callaghan said.
2. Talent Acquisition: Economic uncertainty often leads to a surplus of top talent on the market. SMEs that expand can take advantage of this, by hiring skilled employees who may not be available when the economy improves. This can give a business a significant long-term edge.
“We’ve seen some great talent become available during this downturn – when the employment market has cooled. Businesses that expand now can secure top-tier talent that might not be there when things improve. It’s a great way to strengthen your business for the future,” Callaghan said.
3. Innovation and First-Mover Advantage: Companies that invest in new products or services during tough times can secure a first-mover advantage when the market recovers. By innovating now, SMEs can show themselves as leaders in their industry.
“Expanding gives you the chance to innovate when your competitors are hesitating. If you’re the first to market with a new idea, you’ll be in a much stronger position when the economy picks up again.”
4. Long-Term Competitive Edge: SMEs that manage to grow during a downturn often emerge stronger than their competitors when the economy rebounds. These businesses typically have leaner operations, stronger market positions and are better equipped to handle future growth.
“Businesses that can successfully expand now will lead the pack when the economy turns around. They’ll have built up an efficient operation and they’ll be able to capitalise on opportunities.”
The Risks: What SMEs Need to Consider
1. Opportunity Cost of Inaction: While the risks of expansion are clear, the cost of doing nothing can be just as great. Companies that choose to wait may miss crucial opportunities — whether it’s capturing market share, launching new products, or securing top talent.
“One of the biggest risks is standing still. We’ve seen businesses miss out on opportunities because they were too cautious. Whether it’s launching a new service or hiring key people, waiting too long can mean your competitors get there first,” Callaghan said.
2. Cash Flow Uncertainty: Expanding during an economic downturn can place a heavy financial burden on SMEs. If revenue doesn’t materialise as expected, businesses could struggle to meet repayment obligations, especially if they’ve borrowed to fuel their growth. This is a particular risk in industries where demand has softened, such as retail, logistics and construction.
“If you can’t predict reliable cash flow, you might find yourself overextended. You need to be absolutely sure that your income projections are solid before taking on additional debt,” Callaghan said.
3. Rising Costs: With inflation affecting everything from wages to raw materials, SMEs must factor in the possibility that the cost of doing business could continue to rise. This can erode profit margins and make it harder to realise the benefits of growth.
“Businesses must be prepared for the fact that their expenses could increase even faster than anticipated. Expanding in this environment means you’ve got to have tight control over your cost base.”
4. Interest Rate Sensitivity: Thousands of businesses have felt the effects of interest rates rises, putting added pressure on SMEs trying to service new loans. While rate reductions are widely expected, persistent inflation means the return to lower rates is taking longer than many expected.
“If you don’t factor rates in carefully, your expansion plan could end up costing you more than you expected. Businesses need to be very clear on how they’re going to manage this extra financial load.”
