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SME funding: Non-banks overtake banks for the first time

For the first time Australian SMEs are more likely to use a non-bank ahead of their main bank to fund their 2019 growth plans, according to a national survey of more than 1000 businesses.

The September 2019 SME Growth Index, to be launched this week, is conducted by banking analysts East & Partners, on behalf of national working capital funder Scottish Pacific.

Twice a year owners, CEOs or senior staff of a representative range of small to medium businesses across Australia, with annual revenues of $A1-20m, are surveyed.

Scottish Pacific CEO Peter Langham said during the five years of Index reporting, business owners planning to fund their growth via their main bank has halved – from 38% in 2014 to 18.3% now.

SMEs looking beyond banks to fund business

The September SME Growth Index found intention to fund growth using non-banks is now at its highest, with 18.7% of SMEs saying they’ll support their 2019 revenue growth plans by using non-bank funding.

Only 2.6% of SMEs would not consider using a non-bank lender, almost halving from 4% last year.

The Index results follow recently released Australian Banking Association statistics that show small business loan applications to banks have declined by one-third since 2014.

“While it’s pleasing that business owners are increasingly aware of options outside a property-secured bank loan, the SME sector still has a long way to go in taking advantage of the alternatives available to them,” Mr Langham said.

“This is highlighted by the fact that when it comes to funding growth, overwhelmingly SMEs opt to put their hands in their own pockets – 83% of business owners say this is how they plan to fund revenue growth.

“Some business owners remain unaware of funding alternatives. There’s a much larger group of SME owners who are aware of non-bank funding but don’t fully understand how it works. They are too busy to research it, so put this in the “too hard” basket. When they can’t secure bank funding, they just tip their own money in to fund growth.

“There are smarter ways to fund long-term business growth. We’re working with the relevant government bodies, SME advisors and SMEs themselves to try to increase Australian business owners’ understanding of a range of different ways to fund their enterprises,” Mr Langham said.

Scottish Pacific, partnering with the Australian Small Business and Family Enterprise Ombudsman, recently released a comprehensive independent guide outlining a wide range of funding options suitable for different small business needs.

The Business Funding Guide, targeted at advisors such as accountants, brokers and book-keepers, and the FitsME Guide, its short companion for SMEs, are both available as free downloads.

“How small and medium business owners fund growth is a continuing problem the sector must overcome, with ASBFEO citing figures indicating that up to a third of SMEs say they have had funding rejected,” Mr Langham said.

Why SMEs look to non-bank lenders

Market analysts East & Partners had forecast that non-banks would pass main banks as preferred growth funders in 2020, but this threshold has been crossed in 2019, showing that SME funding plans are shifting quickly.

The September SME Growth Index found that business owners’ main reason for turning away from the banks is the desire to avoid using property security against new or refinanced loans.

This was the key response for 21.3% of SMEs (up from 18.7% in Sept 2018).

Other reasons to choose a non-bank were to avoid personal guarantees/using non-property assets (19.9%), reduced compliance paperwork (19.8%), short application times (17.1%), Royal Commission disclosures (8.8%) and banks’ credit appetite (6.9%).

Most popular sources of alternative finance

Of the SME owners who say they are using non-bank funding options to fund growth, the most popular alternative finance products* are:

  • invoice finance (also known as debtor finance) – used by 77% of respondents
  • merchant cash advances – 23%
  • P2P lending – 10%
  • Crowdfunding – 9%
  • Other online lending – 5%

(*This biennial question was asked in the March 2018 SME Growth Index and will be asked again in 2020 to continue to track trends).

Scottish Pacific is Australasia’s largest specialist working capital provider, helping thousands of business owners with the working capital they need to succeed. Scottish Pacific lends to small, medium and large businesses ranging from start-ups to SMEs with revenues of more than $1 billion.

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Loren Webb

Loren Webb

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