SME Growth Index highlights sector's banking intentions, growth prospects and pain points
By Peter Langham*
Australia's small to medium business sector currently has more varied funding options than ever before, and there are signs that increasing numbers of SMEs are willing to move beyond the banks to fund their growth.
Given AICM members represent significant lenders to the small business sector – with responsibility over $80 billion on any given day – the SME mood for broader funding options that may strengthen cashflow should be on the radar of credit managers.
Twice a year Scottish Pacific's SME Growth Index looks at growth expectations and key concerns of 1200 owners, CEOs or CFOs of Australian SMEs across a range of industries, with annual turnover of $1-20 million.
Since 2014, one of the main trends plotted by the Index has been the move of the SME sector towards non-bank lenders. The number of SMEs funding growth via their main relationship bank has fallen from 38% in 2014 to 27% in late 2017, while the number of SMEs using non-banks has risen from 10% to 22%.
Non-bank lending includes debtor and trade finance and a range of funding options offered by a growing number of fintechs in the market. Usually, the non-bank options have fewer loan conditions, flexible rates and higher customer service and lender flexibility than a standard bank overdraft, and, in the case of debtor and trade finance, there is no requirement for property as security.
Despite a politically supportive environment for SMEs (with initiatives such as investigating access to bank funding and efforts to reduce red tape and discover barriers to productivity), there are signs that many business owners are parking growth and taking a "wait and see" stance.
The sector is uncertain about revenue growth prospects - only 48% of SME Growth Index respondents were predicting their revenue to rise through to February 2018, and on average these businesses were forecasting 4% growth.
Around 23% were expecting negative growth. 28% indicated that their businesses would be stable or consolidating, up from 24% who placed themselves in this category in 2014.
Australian SMEs forecast revenues to improve by less than 1% on average for the next six months to February 2018. This is less buoyant than the average 5% revenue growth SMEs were predicting three years ago.
While twice as many SMEs predict revenues to improve in the next six months compared to those expecting revenue to decline, it is worth noting that on average the declining SMEs are predicting a bigger revenue drop (-6%) than the average revenue increase forecast by growth SMEs (4%).This result is in stark contrast to Round One of the Index in 2014 when the positive change average that was forecast (9%) was more than double the negative change average (-4%).
Of greater concern is the broadening range of negative revenue change forecasts, blowing out from -3 to
-8% in Round One of the Index to a broader spread of -4 to -13% in Round Seven (September 2017).
This indicates that among businesses expecting revenues to decline over the next six months, many firms are flagging serious financial difficulty.
For Index respondents, business investment intentions seem to be on the wane – 47% of SMEs expressed no plans to release new products or services, rising sharply from 31% in 2014.
Around 30% of SMEs are planning to launch new services and 18% planning to unveil new products in the next 12 months.
When only growth SMEs are taken into account, 56% plan new services and 37% new products, with 5% planning to introduce both. For SMEs with no change in growth, or declining growth, 88% have no plans for either new products or services.
For the first time, the Index asked business owners about any impact of rising housing prices on the SME market. Already, one in 10 SMEs indicate that housing prices are creating a reduced demand for their products and services and 7% are holding back on new capital expenditure due to house prices making business investments riskier. This is an issue that should be monitored.
SMEs name dealing with staff as top productivity barrier
SMEs employ more than two-thirds of Australia's workforce, so it's no surprise that within what appears to be an uncertain growth environment for many, workplace issues are high on their list of concerns.
SME owners were clear when asked what was hampering productivity – they named staffing regulations (29%), excessive red tape (23%) and leave provisions (11%) as their main productivity constraints.
The SME sector employs more than two-thirds of Australia's workforce, and the Federal Government has rightly pinpointed this sector as powering Australia's next 25 years of growth – for this to happen, the pain points SMEs have identified around staff issues, red tape and the reporting burden that comes with employing staff must be addressed.
This insight is timely, given the immenent release of findings from the year-long Productivity Commission review. Our SME Growth Index data provides a valuable "voice of the customer" perspective on this important and difficult challenge facing the economy.
Prime Minister Malcolm Turnbull, in announcing his innovation agenda, rightly pinpointed that start-ups and small business would power Australia into the next 25 years of growth.
To fulfil the PM's vision, governments must recognise that many business owners don't have the resources to deal with difficult staff issues and this can make them hesitant to employ new staff.
Top priority for SMEs if they were "PM for a day":
The SME Growth Index asked small business owners what change they'd make if they were Prime Minister for a Day. Their responses reinforce the finding that staffing issues are top of mind for SMEs, and also highlight that SMEs want the government to go further in simplifying Business Activity Statement reporting.
BAS reporting was seen as the major drag on business performance by almost a quarter (24%) of SME owners, who see it as a significant administrative burden.
Despite recent government efforts to streamline BAS, with the introduction of "Simpler BAS" for enterprises with a GST turnover of less than $10 million, the fact it is still SMEs' number one area of concern indicates more needs to be done to relieve this pain point.
The Fair Work Act (22%) and company taxes (22%) are also highly emotive issues for SMEs. More work needs to be done to align the Fair Work Act with small business' needs, while a lower company tax rate would also be warmly welcomed.
Negotiating to remove state government payroll tax (8%) and respective state-based compliance duplication (5%) are other immediate actions that would be taken if SMEs were running the country.
Interestingly, a high number of SMEs provided unprompted feedback to this question, suggesting the introduction of lighter governance and compliance requirements (10%) and making leave provisions more equitable for SMEs (8%).
When investigating what SMEs would prioritise if they were PM for a Day, the Index went further and analysed responses based on the size of the SMEs.
Of SMEs with a $10million plus turnover, one in five (21%) nominated streamlined BAS reporting as the priority change they would introduce. This finding confirms that even at the larger end of the small business sector, there is material concern towards cutting red tape, specifically when it comes to BAS.
The $10million plus turnover SME segment were more likely to nominate reduced company tax as their priority (23%, against 20% of sub-$10million SMEs), and had more of an issue with state compliance duplication (6%, in comparison with 3% of $1million to $10million businesses).
Regardless of SME size, a very similar number of just over 22% of the SME segment nominated changing the Fair Work Act as their priority.
Compliance and governance were greater issues for larger SMEs, with 13% of the $10million plus segment naming this as their priority, as opposed to 8% of the smaller SME segment.
The priority of removing payroll tax (10%) and creating more equitable leave provisions (9%) resonated more with the smaller SMEs than the $10million plus sector.
With the Federal Government's Red Tape Committee due to table its report to Parliament in December, these results give all levels of government a clear indication of the actions SMEs would like to see.
What's happening in the start-up sector?
Market wide, SMEs predominantly perceive themselves to be in a growth phase (37%) or stable phase (30%). The remainder of the segment is split evenly across consolidation (12%), outright contraction (11%) and start-up phases (10%).
Despite a concerted effort by government and industry bodies to support innovation, only one in five positive revenue growth SMEs are in a start-up phase, consistent through all seven rounds of the SME Growth Index.
As indicated in other Index results, taxes, credit conditions and the availability of credit are cited as the three main barriers to growth, clearly impacting Australian start-ups who require improved underlying market demand, less red tape, and tailored funding solutions.
Until these issues are addressed, many brilliant ideas and new business opportunities will not be nurtured through to the highly challenging start-up phase – the economic and political climate remains daunting for bright new sparks to take hold.
Non-banks closing the gap on banks
The SME Growth Index highlights what business leaders see as the main barriers to small business growth – consistent with previous rounds, the top three hindrances for both growth and non-growth SMEs were: high or multiple taxes (75%), conditions of credit (69%) and availability of credit (64%).
When only growth SMEs were taken into account, one other barrier was prominent - more than 60% of growth SMEs named cash flow as an issue that hinders their efforts to grow.
Given these barriers to growth, it is not surprising that the gap is closing between when it comes to SME choice of funders. Non bank funding is the first option for 22% of SMEs, and a full 89% of SME owners plan to also use their own capital to fund new investment.
2017 has seen an almost 10% jump in the number of growth SMEs citing cash flow as a key barrier to business growth. This, combined with the continuing trend of SMEs moving towards non-bank lending, means the time is right for those SME lenders able to step up and solve the cashflow problems of growth businesses.
Results have been rounded up or down to the nearest whole number.
*Peter Langham is CEO of ASX300 company Scottish Pacific
Scottish Pacific Business Finance (ASX:SCO) is Australasia's largest specialist working capital provider, helping SMEs increase cashflow and achieve their business aspirations. Scottish Pacific handles more than $15 billion of invoices each year, providing funding exceeding $1 billion and servicing more than 1700 clients in industries including transport, labour hire, manufacturing, wholesale, import and printing, offering debtor, selective invoice and trade finance and other solutions. For almost 30 years we've helped business owners improve their cashflow free from the constraints of traditional banking. Scottish Pacific was named Australia-Pacific's Best Business Finance Provider in the 2017 International Trade Awards. The business has full service bases in Sydney, Melbourne, Perth, Brisbane, Adelaide, Auckland, London and China. www.scottishpacific.com, LinkedIn Scottish Pacific Business Finance and Twitter @ScottishPacific.
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