Pandemic-impacted SMEs turning to new financing options

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New research reveals that almost half of the SME owners resorted to seeking alternative financing opportunities to stay afloat during the COVID-19 pandemic. According to the latest ScotPac SME Growth Index, 46 per cent of SMEs opted to go with new funding options in 2020, with 54 per cent sticking to their existing style of funding.

The report also noted the following reasons why the 46 per cent of SMEs were looking at the new types of funding:

  • 31 per cent wanted to develop new products and services to diversity revenue.
  • 24 per cent needed funding to buy new or replacement equipment or machinery.
  • 21 per cent felt the need for increased cash reserves 20 per cent had to refinance existing loans.
  • 15.5 per cent found traditional bank funding was unable to meet their business needs.
  • Seven per cent could not rely on equity in their home to fund business requirements.

On the question of how they will fund growth over the next six months, nine out of 10 SME owners said that they will depend on their own funds, while one in five will look outside their existing resources and seek new equity. Notably, 28.3 per cent of SMEs plan to borrow from a non-bank lender to fund growth, the highest recorded in the report’s history. On the other hand, only 16.8 per cent of SMEs intend to approach their main bank and 12.3 per cent turning to other banks.

“Small-business owners are time-poor and often don’t have or make time to research something new, even when it might be a product that better suits their style of business,” ScotPac CEO Jon Sutton said. “I think it is a positive for Australia’s growing non-bank sector that in 2020 so many business owners tried new options, such as invoice finance.

“Having tried new styles of funding that might allow more flexibility and support better cashflow, business owners might think twice about traditional funding in which they have to take on more debt and potentially have to use their personal property as security,” Sutton added.

Sutton noted that the SME sentiment regarding banks and other traditional funding options was reflected in the low uptake of bank loan initiatives in 2020 and 2021, with business owners reluctant to add more debt to already over-leveraged balance sheets.

“This SME sentiment is understandable, however, the result will likely be that many businesses who need an injection of funds just kick the can further down the road, instead of sourcing more appropriate business funding solutions,” Sutton said. “Some parts of the SME sector, depending on the state they are based in and their industry sector, are anxious about the end of JobKeeper so they should be mindful of funding and talk to professional advisers about the best way forward.”

The report also noted that one in four small businesses said they had cashflow issues after being rejected for a loan, and a similar number had cashflow issues because their credit lines were reduced in 2020.

“Small businesses are in need of funding methods that smooth out cash flow gaps and allow them to take on new opportunities,” Sutton concluded.