Our Scottish Pacific SME Growth Index is a twice-yearly snapshot of Australia’s small to medium sized business sectors showing cashflow issues that many businesses face today, below is one of six key insights found in our March 2019 report:
For the first time in the five years and 10 rounds of the Scottish Pacific Business Finance SME Growth Index, the number of SMEs who turn to their main bank to fund growth has dropped under the 20% mark.
Research was conducted from November 2018 to January 2019, after publication of the Banking Royal Commission’s interim report and during the last round of its public hearings.
East & Partners notes that traditional bank borrowing as a primary source of new capital expenditure funding continues to trend lower as more businesses ‘shop around’ for customised funding solutions to help grow their operations.
Significantly fewer SMEs, when asked “how are you planning to fund business growth?”, said they’d approach their main bank (19.5%, a drop of more than three percentage points from September 2018).
When polling began in September 2014, just over 38% of SMEs were turning to their main relationship bank to fund their planned growth.
East & Partners forecasts that if this downward trend continues, alternative lenders will overtake main relationship banks as the key source of growth funding by the second half of 2020.
This round, the biggest gains when it comes to funding growth are for the non-bank lending sector, the first choice for almost 18% of business owners (up from 15% six months ago).
This trend towards non-bank lending is supported by SME intention data.
In March 2018, 43.5% of SMEs said they would not consider using non-bank lending. Twelve months on, not even one-third of business owners are in this category.
The most popular alternative finance product nominated by SMEs to fund their growth was trade and import finance (currently used by almost 33% of all businesses polled), followed by debtor or invoice finance (9%).
Few businesses in the $1-20m revenue category say they are using merchant cash advance (2.5%), peer to peer lending (1.4%), crowd-funding (0.9%) or other online lending options (0.7%).
Previous Index research revealed that 96% of SMEs are drawn to alternative lenders mainly because of fast credit approval and reduced compliance, and the advantage of not having to borrow against the business owner’s home.
It also found that growth SMEs are five times more likely than non-growth SMEs to use an alternative funder in preference to a bank.
Overall, findings this round show that the traditional reluctance of SMEs to move beyond tried and tested working capital management strategies is gradually shifting.
However, there is still strong room for growth for non-banks in the SME finance space: two-thirds of SMEs said they did not use non-bank lending options in 2018, but more than half of these said they’d be open to it in the future.
Alternative finance is building momentum, underlined by the clear reluctance of business owners to borrow against property (see Insight 1).
Since tracking began in 2014, it’s clear that ultimately business owners rely heavily on their own equity.
This round, the percentage of owners dipping into their own funds, always around 90%, has fallen to 84%, a drop of more than five percentage points from six months ago.
This has been driven by the declining or no change SME owner segment, which showed a significant dip in using their own equity to fund their business, from more than 86% last round to 63% now.
East & Partners pinpointed a high proportion of SMEs relying on ‘dumb debt’ (such as personal credit cards) or owners’ equity to fund new productive capacity, commenting that these strategies can limit new business investment opportunities.
They note the potential for latent non-bank credit demand to be realised, with more than 35% of SMEs not yet having ventured beyond traditional bank funding or owners’ equity in the last year, yet indicating they are willing to do so.
Small businesses are seemingly saying to non-bank lenders “make me an offer – I’m listening”.