A record number of Australian small businesses are shifting away from traditional bank loans to generate cash flow amid an unprecedented cost-of-living crisis.
Leading financial solutions company OptiPay has reported a surge in inquiries this month as companies grapple with unpaid COVID tax debt, high inflation, and rising business costs.
“We’ve seen a 200% increase in inquiries over the last quarter from businesses looking to strengthen their cash flow in these challenging economic conditions,” said OptiPay CEO Angus Sedgwick.
“Compared to the same time last year, our new client intake has doubled, with most interest coming from the labor hire, manufacturing, transportation and logistics, wholesale trade, and agriculture industries,” he added.
However, Sedgwick warns that many companies are seeking help with their cash flow management too late.
“On average, we’re declining 2 out of every 5 new inquiries we’ve had over the last few months,” Sedgwick noted. “It is crucial for business owners to address their cash flow issues proactively before creditors, such as the ATO or suppliers, take recovery action. If the ATO or suppliers have lodged tax or payment defaults with credit reporting agencies, it becomes very difficult to obtain finance.”
Sedgwick advises businesses to engage proactively with the ATO to enter into a payment plan, reducing the risk of their financing applications being denied.
According to the Australian Securities and Investment Commission, the number of Australian businesses declaring insolvency has doubled since the start of the year, with 1,136 cases in March, up from 968 in February and 555 in January. Insolvencies were up 37% from the same month a year earlier.
“The best type of business for us to take on is a growing one. They’re running efficiently, have good cash flow, and are making strong sales. However, because of growth, they experience a mismatch in the timing of revenue and expenditure,” Sedgwick explained.
An increasing number of Australian businesses are turning to invoice financing to manage their cash flow cycle. This method allows them to receive an advance on money owed from their outstanding invoices, unlocking cash tied up in their accounts receivable ledger.
Invoice financing remains an underutilized market in Australia, with 65,000 B2B businesses eligible for this cash flow solution, yet only an estimated 4,000 currently using it.
“It allows business owners to be very accurate with their cash flow and budgeting. With invoice financing, they know when they deliver on their sales, they can receive up to 90% of that in cash immediately, enabling them to plan for growth,” Sedgwick said.
We asked experts to discuss alternative lending methods that might be more accessible and suitable for business owners than traditional bank loans.
Jon Sutton, CEO, ScotPac
“Business owners know how challenging (and time-consuming) it can be to qualify for bank funding. Happily, there are fast and secure options outside the traditional bank loan.
“ScotPac has provided these alternatives since the 1980s. We’ve helped thousands of small business owners unlock the value in their business assets, mainly by providing them with debtor finance, trade finance and equipment finance.
“Throughout the pandemic, we supported more businesses than ever before, but it became clear to us just how many small business owners have significant unmet funding needs. That’s why we’ve launched three new solutions to meet an even broader range of business needs.
“This expanded offering gives us the power to get many more deals over the line quickly for SME owners, no matter the size of the agreement or the business circumstances (whether you need to purchase stock, invest in vehicles and equipment or meet cash flow demands).
“ScotPac’s Home Loan for Business Owners is property-secured lending allowing SME owners to use the equity in their home to help fund the business, with bundled savings if they use additional ScotPac solutions such as invoice, asset or trade finance.
“The ScotPac Business Loan is a property-secured facility that allows SME owners to unlock equity in their property to fuel business growth or refinance from other business loans.
“Competing with the more traditional bank overdraft, the ScotPac Business Cash on Call gives fast and flexible funding as a property-secured working capital solution to smooth out cash flow and cover unplanned investments and expenses.”
Dermot Butterfield, Chief Executive at Wych
“As a FinTech startup, Wych considered many options when we were looking to access growth capital. In the end, we settled on a SAFE note as part of our capital raise with an equity crowdfunding platform, VentureCrowd, a Simple Agreement for Future Equity. SAFE notes are not debt, and they don’t carry interest.
“And as there is no interest applied to a SAFE note, the timeline is flexible. We found these to be considerable benefits compared to bank loans or convertible notes. Sharing equity is not for every business, and ultimately that is what a SAFE note is about.
“Their flexibility allows you to access many types of investors, giving your business the best chance at expansion. That is why we chose VentureCrowd; working with their team has been a great experience as they enabled us to access both wholesale investors and crowdfund options.”
Chad Hoy Poy, National Lending Manager, WLTH
“Whether you don’t qualify for a loan or are simply curious about alternative routes, expanding your offices without a traditional bank loan is possible. – Rent to Own In a rent-to-own arrangement, you pay the owner an option deposit, giving you the option to purchase a property after renting it for a set period that spans from one to three years. – Owner Financing In some cases, the owner of the property you are renting may be willing to sell it to you.
“This usually works by making monthly repayments rather than to a bank. – Private Loan Aussies with low credit scores may have better luck seeking out an investment from a lender or a peer-to-peer lender. – Pay Cash The last option is paying for your loan in cash. Making a cash purchase can help you save on closing costs and interest payments.”
Nick Frandsen, Co-Founder & co-CEO of Paloma
One of the greatest challenges that SMEs in Australia face is cashflow, which is why we co-founded Marmalade in 2019 alongside Luke Trickett & some of the early leadership & investors in Afterpay.
Marmalade offers a unique form of working capital, replacing the role of a traditional bank or non-bank finance company for Marmalade’s customers. With Marmalade, businesses are able to get invoices paid when they need it. Alleviating cash flow strain without debt enables startups access to risk-free working capital for growth and ensuring business continuity.
While originally targeted at smaller SMBs which have fewer options for alleviating short term capital constraints, Marmalade has seen significant adoption from a much wider range of businesses, with over $500million in transaction volumes by Australian businesses going through the platform to date.
Paloma is Australasia’s leading venture studio. We have co-created and invested in some of Australia and New Zealand’s fastest-growing startups, including Provider Choice, Marmalade, and Runn.
Matt Allen, CEO, Tractor Ventures
“When you’re growing purposefully, putting your new revenue into acquiring more customers, it’s an exciting time, but also frustrating. Existing lenders look backwards to determine how much they can loan you.
“Tractor Ventures is an Australian investment company offering revenue-based finance to founders growing businesses with at least $50k a month in revenue. As your company grows, you should remember that loans allow you to retain the future value while the business pays for it now, something to consider when your revenue growth and confidence is high!”
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