SME revenue prospects improving but cashflow issues remain

The recent release of the latest Scottish Pacific SME Growth Index, which polls small-to-medium business leaders across Australia, shows half are looking at positive revenue growth in 2018 but they are being held back thanks to cashflow issues.

Nevertheless, the report shows SME owners had improved cashflow in 2017 and are increasingly looking at non-bank lending options to fund growth.

Scottish Pacific CEO Peter Langham said the March 2018 Index shows 50 per cent of SMEs forecasting positive growth revenue – the most since March 2016, but well short of the high of 62 per cent in September 2014. Two-thirds of SMEs reported better or significantly better cashflow compared to 12 months ago.

At the other end of the scale, one in four SMEs forecast negative growth (on average dipping by 6.4 per cent), the highest average since the Index began in 2014. One in 10 SMEs say their cashflow is worse now.

“Whether business owners are optimistic or pessimistic about revenue growth and cashflow, across the board they highlight the major impact of cashflow issues on their operations,” Langham said. “While two-thirds of SMEs report improved cashflow, it’s revealing that nine out of 10 of SMEs say they still had cashflow issues in 2017 and nine out of 10 say these issues impacted on revenue. On average, small businesses say that better cashflow would have increased their 2017 revenue by 5-10 per cent.”

Langham said the most common issues were government red tape (nominated by 71 per cent), suppliers reducing payment terms (38 per cent) and customers paying late (37 per cent). One in five SMEs said they were unable to take on new work because of cashflow restrictions.

For SMEs with plans to invest in expansion over the next 6 months, 24 per cent say they will fund growth by borrowing from their main relationship bank – continuing a downward trend, and well short of the high of 38 per cent who nominated this option to fund growth back in September 2014. More than one in five SMEs (22 per cent) plan to use alternatives to their main bank to fund upcoming growth, with 91 per cent relying on their own funds.

Of the SMEs that used alternative working capital options in 2017, their funding choices were: debtor finance (used by 77 per cent), merchant cash advances (23 per cent), P2P lending (10 per cent), crowd funding (9 per cent) and other online lending (5 per cent).

Langham noted that the growth potential for the non-bank lending sector is significant, given that 48 per cent of SMEs who didn’t use non-bank lending in 2017 are considering it for 2018.

“43.5 per cent of SMEs reported that they were are not using or considering non-bank lending options to improve their access to finance. Despite the Productivity Commission and ASBFEO inquiry findings on the need for more small business credit options, it seems many SMEs are ‘rusted on’ to their bank, to the potential detriment of their business,” Langham added.

“While access to small business funding options could be improved, the fact is that viable, credible business funding alternatives are already out there, and the onus is on not just the providers, governments and SME lobby groups to promote these options, but also on SME owners and their financial advisers to make the effort to look beyond the banks for options that might be better suited to their business needs.”

Langham said Index results show that growth SMEs were five times more likely to use non-bank lending options than declining growth SMEs, perhaps an indicator of business necessity moving owners from beyond intention into taking action.

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