Two-thirds of SMEs propped up by owners’ personal finances

Scottish Pacific’s latest SME Growth Index has found the number of SMEs resorting to personal finances – including credit cards with high interest charges – to support business growth is very high at 65.4%.

A disturbing one-in-five owners regularly dip into their own pockets to fund their business, while almost half occasionally do, prompting calls for SMEs to seek better funding options.

Our latest SME Growth Index has found the number of SMEs resorting to personal finances – including credit cards with high interest charges – to support business growth is very high at 65.4%, with 17% regularly drawing on personal finances and 48.4% doing so occasionally.

The key findings from the research are:

Optimism dips, but SMEs resilient

  • 58% of SMEs are in positive growth mode, with an average revenue growth forecast of 5.2% – down from 6.7% in March 2015, despite low interest rates and a depreciating $AUD.
  • Given the scale and scope of financial market volatility, small businesses are displaying high resilience, with only a slight rise in the number of SMEs preparing for negative growth – 17.5%, who are forecasting an average drop of 4.9%.
  • 6% of SMEs believe their business to be stable or in a growth phase, 11.3% in startup phase and 18.1% consolidating or contracting.

What drives growth is often a mystery, but taxes and credit conditions are clear barriers

  • SMEs are increasingly unsure about what drives their growth – with 35.2% – up from 28.2% when the Index began – saying they are ‘simply following their nose’.
  • A sharp rise in the number of SMEs who believe conditions of credit are a barrier to success, rising from 57.3% a year ago to 62%, almost equaling the perennial top bugbear of high or multiple taxes – 62.7%. Concerns about red tape are also increasing – a key barrier for 56.5%, up from 53.8% a year ago.
  • New product-development plans have stalled. One in five SMEs plan to introduce new products in H1 2016 – 19.6%, down 7.1% since H1 2015. In contrast, the number of SMEs planning to release new services continues to rise, up 7.5% since February 2015 to 35.9%.
  • Willingness to merge with another business has doubled since round one of the Index in September 2014, from 6% to 11.3%.

SMEs are keen to avoid real estate security and look beyond main bank

  • Availability of unsecured credit, where there is no requirement to lend against real estate such as the family home, is the most important factor for SMEs seeking to fund growth by replacing outdated equipment, increasing marketing spend, adding staff or entering new markets.
  • SMEs show strong demand for more flexible lending terms as an alternative to standard-term bank debt, including alternatives such as debtor finance, invoice discounting and factoring. In the past year, there has been a 20.6% increase in non-bank lending demand, from 13.6% to 16.4%.
  • More than two-thirds – 67.9% – of SMEs are willing to pay a higher rate to obtain finance if it means they don’t have to provide real estate security. Almost one-in-three small businesses would definitely pay a higher rate – 29.6% – with a further 38.3% indicating they would ‘probably’ pay a higher rate in lieu of extensive asset/collateral assessments.
  • Ability to talk directly to the lending decision maker was also deemed as highly important, rating ahead of the lender’s industry expertise, credit-approval turnaround time and the interest rate.
  • The number of SMEs intending to use their own funds to finance growth plans has increased from 81.1% to 92.7% since September 2014.

Peter Langham, CEO, Scottish Pacific Business Finance

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