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Aussie SMEs seek alternative financing amid cash flow crisis

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 of Paloma

“There are many avenues available to startups seeking capital beyond your traditional bank loan. One of the lesser-known options is venture studios. Like venture capitalists (VC), venture studios invest people, time, and often capital into startups to help them succeed. Unlike traditional VCs, however, venture builders help burgeoning startups grow, particularly by supporting those that lack expertise in a particular area.

“Referred to as “the new breed of VCs”, venture studios bridge the intersection between an agency, incubator, and a VC, by revolutionising the startup ecosystem and how entrepreneurs approach their business. Overseas and locally, this unique hybrid model has proven successful, having built some of Australia and New Zealand’s fastest-growing startups, including Provider Choice, Marmalade, and Runn.

“By collaborating with a venture studio that aligns with your businesses’ values, goals and vision, startups can find product-market fit and scale faster than they could independently.”

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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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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