Impact of the Global Financial Crisis - Case Study Example

Impact of the global financial crisis Name Instructor’s Name Date The global financial crisis has presented small business owners in Australia with unique opportunities and challenges - from falling orders in the export market due to low demand to difficulty in accessing credit from financial institutions (Lee, 2002). The Australian economy has had to contend with economies such as the United States and Europe and now the growing economies of the Asia pacific such as Japan and China (Shiller, 2008). Financial institutions were at the very heart of the global crisis. This has lead to banks practicing strict financial discipline to ensure that their customers are protected. High interest rates charged by banks to cover for the losses in this financial crisis have played a part in small businesses not getting loans. Small businesses are at risk of being insolvent quicker than large corporations (Lee, 2005). This makes the small businesses a lending risk for financial institutions. The viability of small firms is a risk and so financial institutions will be wary when advancing loans to them. The problem of liquidity is considered to be a high risk factor by many financial institutions. The global financial crisis around the world precipitated the stock markets to fall and the collapse of large financial institutions (Lee, 2005). This led to the banks in Australia to be risk averse and so tightening their lending criteria and increasing risk margins to business borrowers. Small businesses in particular have been affected by the high costs of borrowing from financial institutions (Shiller, 2008). Small businesses are unable to raise finance through other means such as floating shares or corporate bonds and this has made them reliant on financial institutions for new capital. This lack of options available to small businesses makes them rely on banks to finance their expansion plans and other needs that may arise in the course of doing business. Decline in sales because of the decrease in demand has had an impact in the profits of small businesses (Pashley, 2003). This has piled pressure on the retained earnings of the business such that there are limited funds available to finance the business. This hampers the efforts to expand and invest more in the business and has a negative impact to growth. The labor force in Australia is mostly from the small business so if these businesses go down so will the economy of Australia (Lee, 2005). Small businesses still remain a vital source of growth for the private sector and the economy as a whole. The survival of small businesses in Australia is the access to funding. The contribution small businesses are immense because they provide employment to a majority of the Australian private sector. The global economic crisis did threaten the security of economic systems in the world but the small businesses were able to provide jobs and keep the economy moving in the tough economic times. Small businesses need to be guaranteed credit for them to prosper (Lee, 2005). Financing the small businesses maintains the overall strength of the economy. The lack of credit access has lead to expansion plans being put on hold and some businesses to close up. The availability of funding enables small businesses to employ and retain employees, go into new markets and launch new products that benefit the business (Frankel, 2001). Due to the size of small businesses most of them fund their businesses using personal credit cards and some use their homes for security when borrowing. While this may be so for small businesses large businesses such as corporations do not need to do all his just to obtain additional funding from banks. The global financial crisis affected the lending that financial institutions can give out. This credit rationing was not only to small businesses but to large businesses also. The difference is that large corporations have other means of raising additional funding when needed. The decline in credit flows to business by financial institutions The global economic outlook has made the domestic market in Australia to be volatile. Information that businesses receive on a daily basis about the crisis is not helping the matters (Nanto, 2010). The case of defaulting on loans has challenged financial institutions in the way they deal with this challenge. The alarming economic headlines prompt reactions in the market that contribute to making the situation more volatile. Increasing the lending rates for borrowing are some of the measures that banks take and this affects the small businesses more (Davies, 2010). The global financial crisis presents setbacks for the small businesses in Australia. This is because the crisis affected the financial markets, stock market and the real estate market. The stock market provides additional funding for businesses and this cannot take place if the stock market is crashing (Nanto, 2010). Investors loose confidence in this market and so sell their shares and those who do not have to suffer the loss of holding on to these shares. Small businesses that had some of their assets in form of stocks and bonds from other companies’ therefore have a limited way of raising additional finance. The wide spread credit crunch has made it difficult for small businesses in Australia access financing. The crisis has lead to a slowdown in lending because of less demand by businesses in the beginning of the crisis because of the attitude towards debt and the reduced interbank lending because of higher prohibitive interest rates. The loss of confidence in the financial markets has made it difficult for the small businesses to borrow from banks because of the uncertainty caused by the global crisis. Most banks have securities held in real estate and so when the financial crisis started the real estate market was hard hit. Mortgages are sensitive to prices which are determined by the forces of demand and supply. Banks always believed that the mortgages never make for a bad loan because they are assumed to always rise. So when the massive foreclosures stared to happen in the United States small business owners in Australia were cautious lest they fall into the same predicament as most home owners in America were in. The decline of the Australian dollar because of the pressure from the Chinese can not be ignored. Small businesses in Australia compete with china for the same market, which is the Asia pacific (Manne, 2009). China has always been known to produce cheap goods because the cost of production in this country is very low. Cheap labor because of the large population and market has always worked in favor of china. On the other hand small businesses in Australia face stiff competition from the Chinese. Manne (2009) says that with the global crisis the demand for some goods and services has reduced especially commodities that are considered to be luxury. With the sales of these commodities being affected by the crisis, the profits will decline thus weakening the chances of getting credit from a financial institution. The events that lead to the global economic crisis were brought about by financial institutions in the United States and this had a spill over effect on other countries too including Australia (Tindal, 2009). Small businesses that depend on financing from financial institutions had difficulty in accessing funds for expansion and other things because banks had adopted strict measures as regards the lending and especially to small businesses. The government had to step in ensure that small businesses in Australia did not utterly crumble. References Australia Parliament House of Representatives. Parliamentary debates Australia: house of representatives 2008.SI 2008/13, Sydney: HMSO Davies, H., 2010. The Financial Crisis. New York: Polity publishers. Frankel, B., 2001. When the Boat Comes in: Transforming Australia in the age of Globalization. Sydney: Pluto press. Lee, B.C., 2002. The Role of SMEs in National Economies in East Asia. London: Edward Elgar Publishing. Lee, B.C., 2005. Sustaining Growth and Performance in East Asia: The role of small and Medium Sized Enterprises. London: Edward Elgar Publishing. Manne, R., 2009. The Rudd Essay and the Global financial Crisis. The monthly, 45. Nanto, D.K., 2010. Global Financial Crisis: analysis and policy implications. Sydney: Dianne publishing. Pashley, R., 2003.Excell HSC Geography. Sydney: Pascal press. Shiller, R.J., 2008. The Subprime Solution: How Today’s Global Financial Crisis happened, and What to do About it. Los Angeles: Princeton university press. Tindal, K., 2009. Framing the Global Economic Downturn: Crisis Rhetoric and the Politics of Recessions. Canberra: ANU Press. Read More