SME Growth Index results indicate some business owners have already changed their business funding behaviour in response to the pandemic, and others are looking to change.

As outlined in Insight 1, small businesses have flagged their intentions to work with multiple funders (increasingly non-bank lenders) and to consider changing their existing funder.

One in 12 SMEs has already added non-bank funding facilities to deal with the impact of the COVID-19 shutdown. A further one in eight small businesses plan to add non-bank funding facilities to cope with their cash flow needs in 2021.

Trend to non-bank lenders

There’s been a surge in the proportion of SMEs who plan to use a non-bank to fund their new business investment through to April 2021.

Small businesses are now almost twice as likely to fund their new investment using a non-bank rather than their main bank.

Intention to fund new growth using a non-bank reached an all-time high of 27.4%, as SMEs actively diversified their funding base to navigate the aftermath of COVID-19.

Main bank funding of new SME investment is now at its lowest (17.4%), down from 22.6% in H2 2018 and from the high of 38.4% in the first round of the Index in 2014.

SME intention to fund growth by drawing a loan from a secondary bank stands at 13.1%.

The popularity of non-bank funding amongst growth businesses has doubled since 2018 (then, 11.9% planned to fund growth using non-banks, now this figure is 22.6%).

Fewer SMEs looking to invest

Only around half the SMEs polled have plans to fund growth over the next six months (650 out of the 1252 businesses polled).

This is a significant drop from H1 2020, when 752 SMEs planned to invest in business growth. It does not quite match the record low of H2 2016, when only 614 SMEs planned to invest.

The fact that fewer SMEs are looking to invest in their business should be a concern for the sector, especially when it would be best practice for larger turnover SMEs to be making funding decisions much further ahead than six months.

Nine out of 10 of the SMEs planning to invest will fund business investment using their own funds or equity; this is up from an average of 84% over the previous three rounds. Reliance on equity to grow the business has been a constant over the six-year history of the Index.

The next most popular ways for SMEs to fund new business investment were to use non-bank lenders (27.4% of respondents) and to source new equity to fund business demands (21.4%).

Top funding frustrations

Nine out of ten SMEs reported having frustrations about funding their business, and perennial SME funding pain points remain the biggest concern.

The top three frustrations were loan conditions (84.3%), having to provide property security (79.8%) and lack of flexibility (74%), all of which ticked up slightly compared to 18 months ago.

COVID-specific response options were added this round, and some very clear frustrations were highlighted. Two thirds of SMEs (64.5%) were concerned about a lack of a clear recovery path post-pandemic.

Almost half (47%) encountered difficulty accessing government guaranteed loans during COVID-19. Nearly a quarter (22.6%) reported frustrations that online lenders were charging high rates.

The SME frustration that recorded the biggest proportional increase this year was that funders were hard to deal with (an issue for 55.8% of small businesses, compared to 46.8% 18 months ago).

There has also been a significant increase in this pandemic year of SMEs showing frustration that their funders can’t meet all their needs (21.8%, up from 16.1%).

More than a quarter of small businesses (26.6%) don’t feel secure with their lender, pinpointing the need for clear communication and good ongoing relationships with funders.

Those SMEs with non-bank borrowing rather than bank finance report fewer frustrations about:

  • Loan conditions (91.4% of bank borrowers frustrated, compared to 6.7% of non-bank borrowers)
  • Providing property security (93.4% versus 67.4%)
  • Lack of flexibility (97% against 50.6%)
  • Funder is too hard to deal with (72.2% against 39.3%)

Paying down debt

Given SMEs named paying down debt as their top priority for 2021 and given many of the federal stimulus measures which helped prop up the national economy meant SMEs taking on more debt, it’s worth looking at the SME debt landscape.

Historic Index data shows a very large proportion of small businesses use easy access debt (such as personal credit cards or their own funds) to access working capital for their enterprises.

Perhaps the post-pandemic period provides an opportunity for SMEs to make the tough decisions in their business and find better ways to fund them.

2021 is not a time to kick the can further down the road: SMEs need to find ways to unlock capital within the business to ease cashflow issues that can be crippling even in good times let alone during a recession.

It’s probable that the Federal Government’s stimulus, while necessary overall, has artificially propped up many businesses.

Now is not the time for business owners to shy away from tough conversations. Those who do may be in the cohort of Index respondents who end up having to close or sell without significant improvement in business conditions.

In many ways the onus is now on each small business and their advisors – don’t wait until the stimulus is off the table, get on the front foot and make decisions before it’s forced on you.