Australian small and medium‑sized enterprises (SMEs) are walking a tightrope between growth and survival as inflation, rising costs, and tighter cash flow reshape business decisions, according to Banjo Loans’ latest SME Compass Report.
The survey of more than 1000 SMEs shows 38% of respondents cite inflation as the top issue keeping them awake at night, with 46% naming it as the biggest barrier to growth, up from 39% a year earlier. Two‑thirds (67%) expect inflation to continue constraining expansion over the next 12 months. Nearly one in two SMEs (48%) have increased prices in the past year just to stay afloat.
The findings come just days after the Reserve Bank lifted the cash rate by 25 basis points to 4.1%, warning that inflation “is likely to remain above target for some time” amid higher fuel costs and capacity pressures. RBA noted headline CPI running at 3.8% and trimmed mean inflation at 3.4% – still well above its 2–3% target range – and signalled it would not cut rates again until inflation is back inside that band.
Cost pressures are feeding directly into cash flow and investment plans. The report finds 28% of SMEs now see cash flow as a barrier to growth, while 45% have delayed pursuing growth opportunities over the past year due to cash concerns. Over the same period, 43% cut expenses and 39% became more selective about customers and revenue streams.
Banjo Loans chief executive Guy Callaghan (pictured) said the data depict an economy in which most SMEs are still growing, but with heightened caution.
“The Compass Report highlights that SMEs are balancing growth ambitions with survival strategies. Inflation is the dominant pressure, while cash flow concerns are intensifying, forcing businesses to prioritise viability over expansion,” Callaghan said.
The research also reveals many firms remain financially exposed despite solid revenue performance. Half of all SMEs say they could run out of cash within six months if new revenue stopped today. While 69% could survive at least three months without income, just 19% could operate for more than a year. This vulnerability persists even though 69% hit their revenue targets in 2025 and 39% exceeded expectations.
Banjo’s report points to a multi‑speed SME economy. Retailers are feeling the strain most acutely, with 83% nominating inflation as a key growth barrier and 66% citing economic uncertainty. Long‑term confidence in the retail sector has fallen to 55%. In contrast, information media and telecommunications businesses report stronger cash stability and higher long‑term confidence.
Interest rate sensitivity is also rising. The share of SMEs that would change their business settings if rates moved has climbed to 59%, up from 52% last year. If rates rose, 48% say they would act, including refinancing or delaying borrowing; if rates fell, 55% would adjust, most commonly by paying down debt faster.
“Across Australia, SMEs continue to grow and hit revenue targets, but cash reserves remain tight and uncertainty is high,” Callaghan said. “The Compass data shows that SMEs are resilient but cautious and need to carefully manage finances as they navigate business in 2026.”
Broadly, the macro data tell a similar story of resilience under strain. Westpac’s latest Quarterly Business Snapshot points to an economy that has moved “beyond the initial rebound to a more sustainable path”, but with SME cash‑flow momentum lagging larger commercial firms, while NAB’s February Business Survey shows business conditions holding near average even as confidence dips into negative territory after RBA’s February hike.
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