Two in three SMEs looking to alternative funding options

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New research by SME non-bank lender ScotPac indicates that businesses are trying to move past COVID-19 and control things within their power, including trying new ideas to get funding.

The survey noted that 66.1 per cent of SMEs are sourcing funding in areas beyond where they usually look for it, an increase from last year’s 46 per cent.

“The fact so many SMEs tried new funding avenues shows they realise pandemic conditions are a longer-term proposition that they will have to adjust to,” ScotPac CEO Jon Sutton said.

The top three reasons SMEs gave for seeking new funding sources were to buy plant and equipment (57.5 per cent), improve cashflow (40.6 per cent) and pay down debt (34.3 per cent).

When asked what new types of funding they had introduced over the past year to keep the business moving, 55.4 per cent of SMEs said they turned to owner funds, with 42.5 per cent relying on personal credit cards.

“We’d encourage business owners, particularly if they are relying on personal credit cards, to seek professional advice about more sustainable funding options,” Sutton said. “Alternatives could also benefit SMEs funding their business from retained profits as reliance on retained profits can hinder growth, especially if you are facing rapid growth.”

Other common styles of new funding SMEs turned to over the past year include asset and equipment finance (38 per cent) and government stimulus funds (27.6 per cent).

Demand for invoice finance as a new source of funding has more than doubled since 2018: SMEs were almost as likely to boost working capital using a new invoice finance facility (16.3 per cent) as they were to take out a new overdraft (20 per cent).

One in three SMEs did not try new funding methods due to application rejection, (47.3 per cent) excessive admin or documentation requirements, (28.5 per cent) along with a reluctance to take on more debt (28 per cent). Only one in 10 SMEs had no need for additional funding, highlighting the pent-up, unmet demand for working capital in the SME sector.

“Given the pandemic stresses placed on the SME sector, the onus is on financiers to make application processes and ongoing admin as easy and quick as possible,” Sutton said.

Non-bank lending and new equity are seen as the fastest-growing funding methods for new business investment, rising by five per cent and six per cent respectively since the September 2020 Index. Meanwhile, 28.7 per cent plan to use a non-bank lender for new growth measures.

Looking purely at growth businesses, intention to use non-banks to fund new growth has doubled in the past three years (24.2 per cent). 17.2 per cent plan to fund new business investment using their primary bank, while others using a secondary bank (13.6 per cent).

New business investment remains dominated by owners contributing their own funds (82 per cent) despite the array of business funding options available. However, it is noted that this percentage has dropped from 91 per cent a year ago, with SMEs significantly reducing their use of owners’ equity for investment during the pandemic.