Business sector remains 'financially resilient' despite increased pressures: RBA

The business sector appears to be financially resilient overall despite the increased cost pressures facing businesses in the short-term, according to the RBA's latest Financial Stability Review.

The Financial Stability Review for March said that recent survey measures suggest that overall business conditions are now around long-term averages, although conditions still remain weaker in some sectors, such as retail and manufacturing.

The report said that operating profit margins for small and medium-sized firms, based on data available through the June 2025 quarter, were at levels recorded over the decade prior to the pandemic for most businesses.

"This data suggests most firms had been able to slightly improve their operating margins, despite strong input cost growth over recent years," it said.

It noted, however, that this data pre-dated the latest escalation of the conflict in the Middle East and the associated increase in energy prices

The balance sheets of large businesses were a little stronger than historical averages in 2025, which has improved their capacity to absorb shocks, the report said.

"Cash buffers of ASX-listed companies and bank deposits of larger SMEs remained above pre-pandemic levels, supporting their ability to navigate potential cash flow disruptions," it said.

"Aggregate corporate leverage also remains low, with the distribution of leverage across listed companies a bit lower than before the pandemic."

The central bank said this would support the ability of most companies to access liquidity from lenders or bond markets if required.

The report said that the ongoing appetite among lenders to lend to businesses has helped support the resilience of businesses, including smaller businesses.

"Heightened competition for business loans over recent years as lenders seek to expand their business lending, including non-bank lenders, has supported credit availability for some businesses and reduced refinancing risks," it said.

The report warned, however, that cash flow pressures are expected to increase in the period ahead due to increased costs stemming from the escalation of conflict in the Middle East and higher interest rates.

Larger companies are expected to remain resilient to higher interest rates and cost pressures, according to the RBA.

"Changes in borrowing costs typically take some time to pass through to interest expenses of larger firms because many of them issue fixed-rate debt or hedge their interest rate exposure," the report read.

"Balance sheets generally remain a little stronger than normal suggesting that most larger companies would be resilient to tighter-than-expected financial conditions or weaker-than-expected demand."

However, the report warned that higher interest expenses and input costs are expected to increase cash flow pressures for some small businesses.

"Pass-through from a higher cash rate is likely to be quicker for small businesses than larger corporates. This is in part because many smaller businesses take out variable-rate business loans secured with a residential property mortgage," it said.

"Stress relating to higher energy input costs is more likely to be concentrated in firms with very high energy intensities; in general, smaller firms are more likely to fall into this category, as are firms in the transport, mining, agriculture and utilities industries."

However, the report outlined that if conditions evolve according to the central outlook from the February Statement, with stronger growth in private demand in the near term than previously expected and slower growth in unit labour costs, "these may offset some cash flow pressures in the period ahead".

"The incidence of financial stress is expected to remain higher for smaller businesses, particularly in the construction, hospitality and retail industries, because some of these businesses accumulated sizeable debts in recent years, such as unpaid GST collected on sales," it said.

"Information from liaison suggests lenders expect some businesses will continue to experience cash flow pressure but are not expecting a significant increase in business non-performing loans."

The central bank cautioned that risks remain elevated for businesses, given the escalation of conflict in the Middle East, heightened geopolitical tensions and international macro-financial uncertainties.

"An adverse shock could negatively affect some businesses, particularly in more export-intensive industries such as manufacturing and wholesaling," it said.

"As a small open economy, large shocks to global demand or international trade, including shipping costs, would create stress among a range of Australian businesses. Mining, wholesale and manufacturing are the most export-exposed sectors in Australia, though the features of export-exposed firms in these sectors somewhat mitigate financial stability risks that could otherwise arise from overseas shocks."