For the first time, Australian SMEs are more likely to use a non-bank ahead of their main bank to fund their 2019 growth plans, according to a national survey of more than 1000 businesses.
The September 2019 SME Growth Index, conducted by banking analysts East & Partners on behalf of working capital funder Scottish Pacific, surveyed owners, CEOs or senior staff of a representative range of small to medium businesses across Australia, with annual revenues of $A1-20M.
Scottish Pacific CEO, Peter Langham, said during the five years of Index reporting, business owners planning to fund their growth via their main bank has halved – from 38 per cent in 2014 to 18.3 per cent now.
Looking beyond banks
The September SME Growth Index found intention to fund growth using non-banks is now at its highest, with 18.7 per cent of SMEs saying they’ll support their 2019 revenue growth plans by using non-bank funding.
Only 2.6 per cent of SMEs would not consider using a non-bank lender, almost halving from 4 per cent last year.
The Index results follow recently released Australian Banking Association statistics that show small business loan applications to banks have declined by one-third since 2014.
“While it’s pleasing that business owners are increasingly aware of options outside a property-secured bank loan, the SME sector still has a long way to go in taking advantage of the alternatives available to them,” Langham said.
“This is highlighted by the fact that when it comes to funding growth, overwhelmingly SMEs opt to put their hands in their own pockets – 83 per cent of business owners say this is how they plan to fund revenue growth.
“Some business owners remain unaware of funding alternatives. There’s a much larger group of SME owners who are aware of non-bank funding but don’t fully understand how it works. They are too busy to research it, so put this in the ‘too hard’ basket. When they can’t secure bank funding, they just tip their own money in to fund growth.
“There are smarter ways to fund long-term business growth. We’re working with the relevant government bodies, SME advisors and SMEs themselves to try to increase Australian business owners’ understanding of a range of different ways to fund their enterprises,” Langham said.
“How small and medium business owners fund growth is a continuing problem the sector must overcome, with ASBFEO citing figures indicating that up to a third of SMEs say they have had funding rejected,” Langham added.
Why SMEs look to non-bank lenders
Market analysts East & Partners had forecast that non-banks would pass main banks as preferred growth funders in 2020, but this threshold has been crossed in 2019, showing that SME funding plans are shifting quickly.
The September SME Growth Index found that business owners’ main reason for turning away from the banks is the desire to avoid using property security against new or refinanced loans.
This was the key response for 21.3 per cent of SMEs (up from 18.7 per cent in Sept 2018).
Other reasons to choose a non-bank were to avoid personal guarantees/using non-property assets (19.9 per cent), reduced compliance paperwork (19.8 per cent), short application times (17.1 per cent), Royal Commission disclosures (8.8 per cent) and banks’ credit appetite (6.9 per cent).
Most popular sources of alternative finance
Of the SME owners who say they are using non-bank funding options to fund growth, the most popular alternative finance products are:
- invoice finance (also known as debtor finance) – 77 per cent
- merchant cash advances – 23 per cent
- P2P lending – 10 per cent
- Crowdfunding – nine per cent
- Other online lending – five per cent
