A study by leading SME non-bank lender ScotPac found that Australian SMEs are turning away from traditional funding sources, with the use of new funding routes nearly doubling since 2020.
This comes at a time when businesses are attempting to overcome COVID-19-related bottlenecks and gain control over areas of their businesses within their influence, including shifting to new sources of funding.
ScotPac’s SME Growth Index is Australia’s longest-running detailed survey of small business growth prospects, polling 1255 small businesses from all states and key industries. n
The top three reasons SMEs sought new finance sources were to buy equipment (57.5 per cent), improve cash flow (40.6 per cent), and pay down debt (34.3 per cent ).
New funding methods
When asked what new sources of funding they had introduced in the previous year to keep the business running, more than half of the SMEs (55.4 per cent) stated they used owner funds, with 42.5 per cent using personal credit cards.
According to ScotPac CEO Jon Sutton, the latest 2021 SME Growth Index results provide insight into how SMEs are coping with the pandemic, with 66.1 per cent sourcing funding outside of their regular channels. This is a rapid rise from the start of 2021 when only 46% were introducing new funding.
“The fact so many SMEs tried new funding avenues shows they realise pandemic conditions are a longer-term proposition that they will have to adjust to,” Mr Sutton said. “We’d encourage business owners, particularly if they are relying on personal credit cards, to seek professional advice about more sustainable funding options.
“Alternatives could also benefit SMEs funding their business from retained profits as reliance on retained profits can hinder growth, especially if you are facing rapid growth,” he added.
Other common styles of new funding SMEs turned to over the past year include asset and equipment finance (38%) and government stimulus funds (27.6%).
Demand for invoice finance as a new source of funding has more than doubled since 2018: SMEs were almost as likely to boost working capital using a new invoice finance facility (16.3%) as they were to take out a new overdraft (20%).
According to Julia Kagan, Senior Editor at Investopedia, invoice financing is a method for businesses to borrow money against amounts owed to customers. This method allows businesses to improve cash flow, pay staff and suppliers, and reinvest in operations and growth sooner than if they were to wait for their customers to pay their bills in full.
Rejected funding applications
One-third of SMEs did not try new funding channels, primarily because of application rejection. The 47.3 per cent who gave this explanation were evenly divided between those whose applications were completely refused and those who received some but not all of the funds they requested.
Other major reasons for not introducing new funding styles were high administrative or documentation requirements (28.5 per cent), as well as a reluctance to incur additional debt (28 per cent).
Only one out of every ten SMEs had no need for extra cash, highlighting the SME sector’s pent-up unmet demand for working capital.
“Given the pandemic stresses placed on the SME sector, the onus is on financiers to make application processes and ongoing admin as easy and quick as possible,” Mr Sutton said.
“ScotPac has introduced cutting edge technology that allows us to say yes to funding within hours and get capital into accounts within a day or so.”
Alternative lending industry
Non-bank loans and new equity are the fastest growing funding sources for new business investment, increasing by 5% and 6%, respectively, since the September 2020 Index.
More than a quarter of all SMEs (28.7 per cent) intend to employ a non-bank lender to fund new growth initiatives. Looking solely at growth businesses, the intention to employ non-bank lenders to support new expansion has more than doubled in the last three years (now at 24.2 per cent).
Not quite one-third of SMEs (17.2%) want to fund new business investments through their primary bank or a secondary bank (13.6 per cent). Despite the variety of business funding sources available, new business investment is still dominated by owners investing their own capital (82 per cent).
However, this number has plummeted from 91 per cent a year ago, indicating that SMEs have drastically reduced their utilisation of owners’ equity for investment during the pandemic.