As 2021 progresses, small businesses have shown an increasing appetite for new funding sources. Two in every three SMEs (66.1%) introduced new funding options during the past year.

This is a large jump even from six months ago, when 46% of SMEs had ventured beyond their traditional funding methods.

The latest SME Growth Index found that larger SMEs (those with $5-20m annual revenue) were more inclined to try new funding options – with 72.7% of them taking the plunge compared to 60.4% of smaller SMEs ($1-5m revenue).

Businesses outlined the new funding sources they tried – some of the choices are sustainable and good business practice; others, such as reliance on credit cards, have inherent risks:
• 55.4% added the use of existing equity or owner funds
• 42.5% used personal credit cards to fund short term receivables
• 38% applied for asset and equipment finance
• 27.6% relied on JobKeeper or other government stimulus
• 20% took out a new overdraft
• 16.3% sourced new debtor finance (invoice finance)
• 15.9% sought a new secured bank loan
• 8.8% borrowed from an online fintech
• 5.3% sought supply chain finance

The demand for invoice finance as a new funding option has more than doubled since early 2018, sitting at 16.3% taking out a new invoice finance facility in the past 12 months as opposed to 7.6% three years ago.

Business owners indicated they are just as likely to utilise a new invoice finance facility as to seek a new secured bank loan.

The fact that four in 10 businesses are relying on the owner’s personal credit cards as a new source of funding is a sign of potential trouble, according to market analysts East & Partners. However, the market analysts believe that the similar proportion of SMEs applying for asset and equipment finance is a positive, indicating a desire to update business equipment to ensure they are ready to take on new opportunities and survive market disruption.

How SMEs put their new funding to work

Of the SMEs who used new funding options in the past year, the majority (57.5%) allocated it to capital expenditure to purchase plant and equipment.

A large cohort (40.6%) said they sought new financing to improve their cashflow.

A third of businesses (34.3%) used new funding to pay down debt, 29.3% to secure large projects or clients and 20.6% to increase their cash buffer or replace JobKeeper.

Other common reasons for seeking new funding were to expand capacity (20.2%), refinance existing loans (16.6%), hire staff or upskill existing staff (15.1%) and enter new markets or create new products (7.1%).

A small but significant cohort (7.2%) put their new funding to work to reduce their reliance on using their home as business security.
Despite four out of 10 SMEs saying they restructured their business in the past year, only 6.4% said they took out new funding options in order to complete a restructure.

Industry sectors had different uses for new funding

When responses were analysed by key industry sectors, retail SMEs were most likely to have used their new funding to pay down debt, fund a merger/acquisition or reduce funding against their home.

Manufacturing and retail were the industry sectors most likely to use the new funding to buy equipment or machinery. Manufacturers were also most drawn to using new funds to chase large projects and look for new markets.

Wholesalers were most likely to use new funds to replace stimulus money and to refinance existing loans.

The top three new funding uses for mining businesses and transport SMEs were to purchase equipment or machinery, pay down debt and increase cash reserves. Mining SMEs were also the most likely industry sector to use new funds to hire or upskill staff.

Why some SMEs didn’t try new funding options

What was holding back the one-third of businesses who did not use new funding solutions?

For almost half of this cohort, the brick wall was having their loan application either fully rejected (23.8%) or partially rejected (23.5%).

Excessive documentation requirements prevented 28.5% of SMEs from introducing new working capital management solutions. A further 28% said they were reluctant to increase liabilities by taking on further debt, while 15.1% already had sufficient cash reserves and 9.9% couldn’t find funding that met their needs.

Around one in 10 of the businesses that did not use new funding (11.8%) said it was because they had no need for additional funding.

Rise of the non-bank lenders

Non-bank lending and new equity are the fastest growing funding methods for new business investment, rising by 5% and 6% respectively since the September 2020 round of research.

Well over a quarter of all SMEs (28.7%) plan to use a non-bank lender to fund new business investment. Looking purely at growth businesses, their intention to use non-banks to fund new growth has doubled in the past three years (12.4% to 24.2%).

When it comes to bank lending, not quite one-third of SMEs plan to fund new business investment using their primary bank (17.2%) or a secondary bank (13.6%).

This represents a modest recovery in main bank borrowing since H1 2021 (up 0.4 percentage points), with a return to H1 2020 levels. Analysts East & Partners observe that this could be due to the heavy focus on bank products within the pandemic stimulus measures.

New business investment remains dominated by owners contributing their own funds (82%) despite the array of business funding options available.

However, it is notable that this percentage has dropped from 91% a year ago, with SMEs significantly reducing their use of owners’ equity for investment. Perhaps the cash buffer accumulated from government stimulus measures is being kept for the next “rainy day”.
SMEs and their advisers are encouraged to download this free Business Funding Guide created by ASBFEO and ScotPac to consider a wide range of funding styles that might suit their business.