Real Wages Are Going Backwards — Martin Iglesias on What This Means for SME Borrowing Power

For the first time in over two years, Australian workers are going backwards in real terms. Data released today by the Australian Bureau of Statistics confirms what many households already feel at the checkout: inflation is outpacing wages, and the squeeze is getting tighter.

The numbers tell a sobering story. The Wage Price Index rose 3.4 per cent over the year to December 2025, while annual inflation came in at 3.8 per cent. That gap may look small on paper, but its effects ripple well beyond household budgets — particularly for small and medium-sized businesses trying to access finance.

The lending equation has shifted

Here's the thing most business owners don't immediately grasp: when the cost of living rises, it doesn't just affect what their employees can afford. It directly affects what they can borrow.

Banks factor household expenditure into every lending assessment. When the ABS data shows that costs are climbing — groceries, energy, insurance, transport — the banks adjust their models accordingly. And those adjustments cut into borrowing capacity, sometimes dramatically.

"The cost-of-living rises are being factored in by the banks on their assessments," says Martin Iglesias, Credit Analyst at Highfield Private. "Monthly expenditure has gone up significantly, and that's cutting back the borrowing capacity for customers. It offsets the rate reductions when you're looking at their servicing, because the cost of living is higher than what they're saving on interest."

This is a crucial point. Even when rate cuts were flowing through in 2025, the benefit was being quietly eroded by rising living costs. Now, with the RBA hiking the cash rate to 3.85 per cent in February — its first increase since November 2023 — the equation has tilted even further.

The buffer that bites

On top of the actual rate, banks apply an interest rate buffer of around 3 per cent when assessing a borrower's ability to service a loan. At a cash rate of 3.85 per cent, that means many borrowers are effectively being stress-tested at rates approaching 7 per cent.

For SME owners whose personal guarantees underpin their business borrowing, this hits hard. A business that comfortably serviced its debt twelve months ago may now find itself on the wrong side of the bank's affordability calculations — not because anything has changed in the business itself, but because the assessment methodology has caught up with the macro environment.

What this means on the ground

The practical impact is already showing up in lending conversations. Roy Morgan's January 2026 Business Confidence Index dropped 7.6 points to 97.4, its lowest level in nine months. Only a third of firms expect to be better off in twelve months. And the RBA's own Statement on Monetary Policy forecasts that underlying inflation will peak at 3.7 per cent by mid-2026 before slowly moderating.

For SMEs in the midst of that cycle, the challenge is real. Working capital shortfalls are one of the most common issues Iglesias encounters in his work.

"They've got a need to supply, or a need to manufacture or import, but to deliver on the contract, they need the funding upfront," Iglesias explains. "Then they need to wait 60 to 90 days — sometimes even longer — for payment. They end up with massive working capital shortfalls, and the cash flow just isn't sufficient."

When borrowing capacity shrinks at the same time as working capital demands grow, businesses find themselves caught in a vice.

What business owners should do now

The temptation is to wait it out and hope the environment improves. But Iglesias counsels a more proactive approach.

First, get your financials in order. Banks are increasingly willing to assess applications on just 12 months of financial statements, rather than the two to four years they traditionally required. Businesses with strong recent performance have a genuine opportunity — but only if their documentation is clean and current.

Second, don't let tax obligations slip. Banks now routinely access ATO portals to check for arrears, and any outstanding tax debts will stop an application in its tracks.

"They can't be going to a bank with taxes in arrears," Iglesias says. "The banks just get very jittery about that. They won't give it any thought if there are taxes outstanding."

Third, understand the full range of options available. The major banks remain the cheapest source of finance, but alternative lenders can offer higher loan-to-value ratios and more flexible terms for businesses that don't fit neatly into traditional assessment models.

The key is to plan ahead. As Iglesias says: "Don't put the cart before the horse."

The bigger picture

The RBA's February rate hike was a wake-up call. The era of easy monetary policy that characterised much of 2025 is over, and the central bank has made clear it will do what's necessary to bring inflation back within its 2 to 3 per cent target band — even if that means more tightening ahead.

For SMEs, the message is straightforward. The lending environment has become more demanding, and the cost-of-living squeeze is making it harder to qualify for the finance that fuels growth. But businesses that prepare carefully, keep their financial house in order, and seek expert guidance early in the process will be best positioned to navigate what comes next.