Against the backdrop of a likely property market downturn and the final Royal Commission into Banking report, our latest SME Growth Index paints a clear picture for credit managers of Australia’s small business owners’ key concerns.

The two main take-aways, quite likely interconnected, are that the SME sector’s appetite for broader funding options continues to grow, and that cash flow issues are the major brake on growth in the sector.

Our survey polls more than 1200 owners, CEOs or CFOs of Australian SMEs across a range of industries, with annual turnover of $1-20 million.

The latest findings show that cash flow remains their biggest worry - SMEs are operating in an environment in which they say they could have generated, on average, 17% more revenue if their cash flow had been better. This equates to an annual $A234.6 billion hit to the national economy.

Working capital is what every business always needs, whether they’re growing, steady or even declining. Our findings show that in an economic environment where it is crucial to have reliable working capital, nine out of 10 SMEs self-fund growth rather than looking for funding options that would allow them to bolster the working capital within their business.

Best SME outlook in three years

First, the good news – the number of businesses reporting positive growth over the coming 12 months (51%) is at its highest since early 2016.

Between March and September 2016, SMEs flagging positive growth fell from 58% to 48%. While not yet back to the growth levels reported in our first Index in 2014, since late 2016 there has been a steady move towards a majority forecasting growth.

However, the results also show that SMEs who are performing poorly are in significantly more trouble than back in 2014. The extreme negative growth margin is much greater now.

We also see that since our first Index, SME respondents’ average number of fulltime employees has fallen from 88 to 71.

The number of business owners who are not growing, but say they are stable (27%) or consolidating (13%), has increased from 32% in 2014 to 40% now – 12% say their business is contracting, up considerably from the 8.5% who were contracting in 2014.

 Cashflow being squeezed from both ends

Almost all SMEs (92%) said if cash flow had been better in the past 12 months they would have generated more revenue, with only 8% reporting no cash flow issues in the past 12 months.

More than half (55%) indicated that revenues could have increased by 5-25% if cash flow improved.

With business owners saying cash flow is their key cause of sleepless nights, we asked what caused the biggest negative impact on their cash flow over the past 12 months.

As in previous rounds, SMEs are still blaming Government red tape and compliance issues (nominated by 73%, across the total market of growth, consolidating and declining SMEs).

The other main cash flow issues are the dual problems of customers paying late (43%) and suppliers reducing payment terms (40%).

SMEs are feeling the pressure from both ends of the supply chain, placing major strain on efficient working capital management.

There has been a noticeable tightening in cash flow throughout 2018, despite a low interest rate environment and broadly improving operating conditions and business confidence.

More than one in four SMEs (27%) said they had difficulty meeting tax payments on time and one in five (21%) were unable to take on new work and capital expenditure due to cash flow restrictions.

This finding shows credit managers that there’s plenty on the table for any SME business which can improve its cash flow.

With cash flow concerns increasing, and banks reluctant to lend, the business owner who can find innovative ways to fund growth and master cash flow management has a clear advantage over competitors.

Non-bank funding on SME radar

Despite an SME lending landscape dominated by the Big Four banks and their subsidiaries, 96% of SMEs could name a key advantage to borrowing from an alternative (non-bank) lender.

Rapid credit approval was named by one in four business owners as the main reason they’d use an alternative lender.

Avoiding the banks’ document-heavy regulatory requirements was the next biggest drawcard, nominated by almost one in five SMEs.

Another advantage was the incentive of not having to borrow against property, cited by one in five SMEs.

Almost one in 10 SMEs said the revelations from the Banking Royal Commission would prompt them to seek out non-bank alternatives to fund their business.

Encouragingly, only 4% of SME owners say they would never consider a non-bank lender.

This is good news for the long-established debtor finance (invoice finance) sector, and the emerging fintech industry, who are offering SMEs broader funding options beyond the banks than ever before.

 Property security out of favour

With SME Growth Index findings showing many business owners are cash-strapped, time-poor and confused about how to fund their growth, it’s interesting to see one thing they are not confused about – around 91% would prefer not to have to use property as security.

A shift away from primary bank relationships is taking place in the SME segment, despite SMEs historically being reluctant to shop around for improved credit terms.

Analysts East & Partners believe that as customer switching intentions ramp up, alternative lenders will continue to increase in prominence as a preferred funding source.

For the whole SME market (growth and non-growth), nine out of 10 plan to use their own funds for new business investment, ahead of primary bank borrowing (22.5%), alternative lenders (15%), taking on new equity (13%) and borrowing from regional banks (10%).

Of the 733 respondents planning to seek new credit, more than half (56.5%) would prefer a loan secured against non-personal assets, and a quarter (almost 23%) would prefer to borrow against receivables.

More than one in five preferred an unsecured overdraft facility – a full 30% were not sure about their preferred funding method.

SMEs generally prefer business loans with a tenor of one to three years (64%), ahead of longer three to five-year credit facilities (12.5%) or shorter two to four quarter terms (12%).

One thing is clear - SMEs are looking for growth funding. The fact that one third of respondents wanting to borrow are seeking $500,000 to $2million over the next 12 months, combined with the positive growth trend, are reassuring signs for the Australian economy.

However, with recent property market falls across most capital cities, and the trend of declining home ownership especially in younger age brackets, the challenge facing business owners is finding ways to fund growth.

Entrepreneurs and small business owners can no longer rely on the buoyant property market to deliver the increasing equity they’ve historically depended on to source additional funding.

Given that so few want to use their home as security, credit managers can play a role, along with other key influencers, in sector-wide education to highlight to SME business owners low-risk options that are not secured against property.

An option beyond property security

For all SMEs, days outstanding is more than just a statistic. It can really have a substantial impact on cashflow and on costs – even on the personal finances of the business owner.

Fortunately, there are now finance options that help keep business finances and personal finances separate, that don’t require property as security and that can have a positive impact on a business’ cashflow position.

Receivables funding, also known as debtor finance or invoice finance, is what Scottish Pacific has specialised in for 30 years and is a style of funding that can help keep SMEs credit-worthy.

An SME business will use their receivables - outstanding invoices owed by customers – rather than use property to gain financing.

It allows a business to draw down against the value of the receivables ledger, getting a cash injection up front instead of waiting out their typical cash cycle before gaining access to the funds.

This method frees up working capital to pay wages, suppliers and anything else required to sustain the business or to fund its growth.

As an additional benefit, the limits grow in line with the value of the invoices the business owner has outstanding, so they don’t fall short of cash as they grow.

There’s a lot to be said for being able to pay suppliers promptly, not the least is that if an SME doesn’t pay suppliers or meet tax obligations promptly, it can have a significant impact on their credit rating.

Late payment poses significant risks to any SME business. Yet smart financial solutions such as invoice finance, coupled with efficient accounts and collections procedures, allow a business to access precious working capital to fund growth and business plans.

With bank credit tightening, it’s an option more SMEs, and those who advise them, should explore.


*Wayne Smith is Group Executive Debtor Finance at Scottish Pacific, Australasia’s largest specialist working capital provider. Scottish Pacific provides thousands of business owners with the working capital they need to succeed, lending to small, medium and large businesses with revenues ranging from $500,000 to more than $1 billion. Scottish Pacific handles more than $15 billion of invoices each year, providing funding exceeding $1 billion and servicing clients in industries including transport, labour hire, manufacturing, wholesale, import and printing., For 30 years we’ve helped business owners improve their cashflow, free from the constraints of traditional banking.

For more information contact:

Kathryn Britt

Cicero Communications 

Tel: 0414 661 616

December 2018

Download Article