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SMEs turn towards non-bank lenders to fund growth

A poll of Australian small businesses shows that almost half (46%) introduced new funding options in 2020 to deal with the pandemic and its aftermath.

ScotPac’s SME Growth Index is Australia’s longest-running in-depth research on small business growth prospects, with 1253 small business owners polled this round.

ScotPac CEO Jon Sutton said the research provides a snapshot of the small business mindset and experience during COVID-19 and its aftermath, with results showing SMEs were willing to look beyond traditional funding methods in order to keep their businesses functioning.

Why SMEs sought new funding methods
Of the 46% of SMEs who had introduced new funding options in 2020 (with 54% sticking to their existing style of funding), their most common reasons for trying new funding methods were:

  • 31% wanted to develop new products and services to diversity revenue
  • 24% needed funding to buy new or replacement equipment or machinery
  • 21% felt the need for increased cash reserves
  • 20% had to refinance existing loans
  • 5% found traditional bank funding was unable to meet their business needs
  • 7% could not rely on equity in their home to fund business requirements

How SMEs plan to fund 2021 growth

When asked how they would fund new growth for the next six months, nine out of 10 SMEs will rely on their own funds, while one in five will seek new equity. Researchers East & Partners’ analysis is that small business’ growth opportunities are being curtailed by this reliance on their own funds or traditional bank loans, when options such as invoice finance would allow businesses to access additional capital without taking on debt or having to make loan repayments.

Mr Sutton said a new high (28.3%) of SMEs plan to borrow from a non-bank lender to fund growth.

Despite a deluge of government stimulus measures linked to bank lending, intention to use banks to fund growth was at a record low for the Index (with 16.8% of SMEs intending to use their main bank and 12.3% turning to other banks).

“Small business owners are time-poor and often don’t have or make time to research something new, even when it might be a product that better suits their style of business,” Mr Sutton said.
“I think it is a positive for Australia’s growing non-bank sector that in 2020 so many business owners tried new options, such as invoice finance.

“Having tried new styles of funding that might allow more flexibility and support better cashflow, business owners might think twice about traditional funding in which they have to take on more debt and potentially have to use their personal property as security.”

Growth businesses look to non-bank options
Non-bank borrowing intention was particularly clear when only enterprises who identified as growth businesses are considered – 24% of growing enterprises intend to fuel growth by using non-bank funding, compared to 16% who planned to take out a loan from their main bank.

Mr Sutton said this SME sentiment was reflected in the low uptake of bank loan initiatives in 2020 and 2021, with business owners reluctant to simply add more debt on to already over-leveraged balance sheets.
“This SME sentiment is understandable, however, the result will likely be that many businesses who need an injection of funds just kick the can further down the road, instead of sourcing more appropriate business funding solutions.

“Some parts of the SME sector, depending on the state they are based in and their industry sector, are anxious about the end of JobKeeper so they should be mindful of funding and talk to professional advisers about the best way forward.”

Mr Sutton said options such as invoice finance, which uses a business’ unpaid invoices to secure a line of credit that grows in line with a business, allow business owners to have more control over their cashflow.
“Cash is always king but no more so than during the pandemic. One in four small businesses said they had cash flow issues after being rejected from a loan, and a similar number had cash flow issues because their credit lines were reduced in 2020,” Mr Sutton said.

“Small businesses are in need of funding methods that smooth out cash flow gaps and allow them to take on new opportunities.”

ScotPac partnered with ASBFEO to create the Business Funding Guide for small businesses and their trusted advisers (such as accountants, brokers and bookkeepers). Download this free guide.

SME Growth Index: Twice a year since 2014 market analysts East & Partners conduct this research, Australia’s longest-running in-depth research on small business growth prospects. In Jan-Feb 2021, a representative national sample of 1253 $1-20m revenue businesses were surveyed and interviewed.

ScotPac is Australia and New Zealand’s largest non-bank business lender, providing funding to small, medium and large businesses from start-ups to enterprises exceeding $1 billion revenues. For more than 30 years ScotPac has helped thousands of business owners succeed, by unlocking the value from their business assets. Whether it is purchasing stock, investing in vehicles and equipment, improving cash flow or accessing additional working capital, ScotPac can help.

For more information contact:

Kathryn Britt
Director, Cicero Communications
[email protected]
0414 661 616