Non-banks set to pass main banks in funding SME growth

For the first time in the five years, the number of SMEs who turn to their main bank to fund growth has dropped below the 20 per cent mark, according to the SME Growth Index’s recently released March 2019 research which was conducted independently by banking analysts East & Partners, on behalf of national working capital funder Scottish Pacific.

The March 2019 Index findings show that for the first time SMEs are about as likely to turn to an alternative lender as they are to ask their main bank to fund growth. East & Partners predicts that, if the current trend continues, by the second half of 2020 alternative lenders will overtake SMEs’ main relationship banks as the key funders of new SME business investment in Australia.

Scottish Pacific CEO Peter Langham said there were many reasons behind this trend, including banks’ credit conditions tightening, business owners looking for more flexibility and funding that allows them to grow, as well as the tightening property market and SMEs’ dislike of having to use property as security for their business loans.

“Small-business owners traditionally have been ‘rusted on’ to their banks, but they are becoming increasingly open to non-bank alternatives to fund their operational and strategic growth needs,” Langham said. “The main change we’ve seen in the non-bank lending environment recently is that we are funding larger deals.”

“The research shows that when it comes to funding growth, traditional bank borrowing keeps trending downwards, as more businesses ‘shop around’ for a customised funding solution.”

The research was conducted from November 2018 to January 2019, after the publication of the Royal Commission into Banking’s interim report and during the last round of its public hearings. Significantly fewer SMEs, when asked “how are you going to fund your expected business growth in the next six months?”, said they’d approach their main bank (19.5 per cent, a drop of more than three percentage points from September 2018).

The biggest gains were made by the non-bank lending sector, the first choice as funders of growth for almost 18 per cent of business owners (up from 15 per cent six months ago). Also noteworthy is that back in March 2018, 43.5 per cent of SMEs said they wouldn’t consider using non-bank lending. Twelve months on, not even one-third of business owners are in this category.

The research revealed that 96 per cent of SMEs are drawn to alternative lenders mainly because of fast credit approval and reduced compliance, and the advantage of not having to borrow against the business owner’s home. Growth SMEs are five times more likely than non-growth SMEs to use an alternative funder in preference to a bank. Langham noted that, despite the gains into the SME market made by non-banks, there was still room for sector growth.

“Alternative finance is building momentum, underlined by the clear reluctance of business owners to borrow against property,” Langham said. “The SME Growth Index found that nine out of 10 SMEs would be willing to accept a higher interest rate if it meant they didn’t have to provide property security.”

 

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