A steady supply of working capital is vital to the success of SMEs. Whether it’s for business expansion, investing in new equipment or any other reason, companies need funding to stay afloat.

Unfortunately, obtaining funding has become increasingly difficult in recent years. Scottish Pacific’s March 2019 SME Growth Index discovered that 1 in 5 SMEs said it was more difficult to access funding in 2018, and 1 in 3 said it will get harder to do so in the future.


In this post, we’ll discuss the top funding frustrations for Australian business owners in 2019, as well as some effective solutions for generating capital.


The Big 3

An overwhelming majority of SMEs (87%) are frustrated with their current business funding strategies, according to the March 2019 SME Growth Index. While there were numerous factors that created frustration, three issues stood out the most.

  1.  There are unfavorable loan conditions, with just over 80% of SMEs citing this as a major frustration. More specifically, the Index found, “SMEs funded by banks are three to four times more likely to be frustrated by loan conditions than those using non-bank lenders as their primary funders.”
  2. There’s the issue of having to provide property security, with 79% of business owners saying it’s a frustration. Property downturns throughout much of the country — especially in Victoria and NSW — have had a negative impact on business funding. “Almost half the SMEs (44.5%) say property market conditions are already making it harder for them to access business funding, likely due to softening house prices in major markets.”The problem is that property security is often used as collateral by major banks to protect themselves from loan default. In fact, 35% of their small business lending is secured by real estate. And that number is even higher for smaller banks where it’s nearly 47%. The frustration is so big that more than 91% of business owners are willing to pay higher interest to avoid the hassle of dealing with property security.
  3.  There’s loan inflexibility, with 73% of SMEs claiming it’s a frustration. While there are a few reasons for this issue, one of the most notable is the Royal Commission, which was designed to cut back on misconduct in the banking and financial services industries. Because of it, many business owners fear a “credit crunch” that will make it significantly more difficult to obtain funding than in the past.And just like unfavorable loan conditions, there’s a trend where business owners feel a deeper frustration dealing with bank lenders than they do with non-bank lenders. In fact, “SMEs using bank funding are almost four times more likely to be frustrated by a lack of flexibility in funding.”


Other Factors

Beyond that, 48% of business owners feel frustrated about short loan terms, and 47% feel frustrated dealing with lenders. Many companies are finding themselves in a predicament where they’re dealing with a limited timeframe to repay their loans. Short loan tenors give them less wiggle room and can create a lot of stress.

As for frustration dealing with lenders, one of the main catalysts for this sentiment is the Royal Commission. In an effort to prevent malpractice among banks and financial services firms, it’s created an environment where lenders are more selective about who they give money to. In turn, it’s creating a hardship for many SMEs.

Other lesser frustrations that are still worth mentioning include:

  • Not feeling secure with a lender – Nearly 24% of business owners
  • Lender doesn’t meet all of their needs – 16%
  • Having to dip into personal finances to fund growth – 6%


Main Reasons Why SMEs Seek Funding

So what exactly motivates Australian business owners to seek credit? The March 2019 SME Growth Index found there are 4 primary triggers.

One is to expand their business, with this being the reason for 58% of respondents. Ongoing access to capital and periodic cash flow injections are both critical to the health and longevity of SMEs, and many simply don’t have the finances to come up with the money on their own. Therefore, they seek out a lender who can help sustain them throughout key growth stages.

Another is to purchase new machinery or equipment, with this being the main reason for 53% of respondents. Everything from company vehicles and production machinery to computers and electronics can play a role in an SME’s long-term success. So they need a reliable means of financing these items.

Loss of a major customer is the reason behind 47% of business owners seeking funding. This puts an SME in a tough position, but having adequate funding can help them weather the storm and get back on track.

And finally, growth in customer demand triggers 25% to look for capital. In some cases, SMEs experience considerable growth and need funding to keep up with demand.


How to Ensure Business Owners Have Access to the Capital They Need

The data from this report clearly shows that SMEs are more likely to be frustrated when using banks rather than non-bank lenders. As we mentioned earlier, unfavorable loan conditions, having to deal with property security and loan inflexibility all soured the experience.

This isn’t to say that traditional banks are never the right choice. But given the current climate with property downturns and the Royal Commission, dealing with banks is certainly a lot trickier than it used to be. So it’s wise for business owners to explore their options with non-bank lenders.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and Scottish Pacific Business Finance have developed an Australian-first independent Business Funding Guide, which gives advisors the tools to help businesses become finance fit and choose the right funding option. A companion guide, FitsME: Essential Guide to Business Funding, has also been produced to give business owners the best chance of funding success.

The Business Funding Guide covers:

  • The 6 key indicators that a business may need funding
  • How to prepare for a funding application: getting business accounts in order, write/review the business plan, conduct a finance fitness check
  • Key trigger questions to start a conversation about funding options
  • The 3 questions to ask a lender when a loan application has been rejected

Three financing solutions that immediately come to mind for SMEs to access working capital include:


1. Debtor Finance

One option that countless companies have had success with is debtor finance, which is a line of credit that’s secured by outstanding accounts receivable. Rather than having to deal with property security like many banks require, this allows SMEs to use their outstanding invoices as collateral instead.

It involves a simple, three-step process.

  1. Upload an invoice – The same one that’s sent to a client is sent to the lender.
  2. Wait for approval – This typically happens within 24 hours. Once approved, a business owner receives up to 95% of the value of approved invoices, less any fees.
  3. Receive a cash advancement – The remaining 5% is made available once the client pays in full.


2. Peer-to-Peer Lending

Driven by advancing technology, peer-to-peer lending involves using a platform to connect borrowers and investors. That way borrowers can obtain the financing they need, and investors can make a profit without either party having to go through a traditional bank.

Doing so takes the institution out of the equation and gives borrowers a great alternative that wasn’t available in the past. Check out this guide from The Balance to learn about 8 of the top peer-to-peer lending sites in 2019.


3. Equipment Financing and Capital Raising

Financing that is linked to your working assets allows businesses to not only fund the next vital purchase to progress their growth and prosperity, but can also be used for capital raising and security for funding even after the assets have been purchased.

Some financiers, such as Scottish Pacific, will lend against a variety of specialised equipment, fund second-hand equipment purchases, and provide solutions to importing equipment from overseas.


Overcoming Funding Frustrations

You could make the argument that obtaining business capital is harder than it’s been in a long time. While there are a number of reasons for this, two of the biggest are the property downturn throughout major areas in Australia and the Royal Commission.

Many SMEs are in a difficult position where they feel increasingly frustrated going the conventional route of seeking funding from banks. Fortunately, there are other alternatives, with debtor finance and peer-to-peer lending both being viable options.

What’s your top funding frustration at the moment? Please share your thoughts and find out how we can help here, or call us on 1300 505 883