Small-business owners who use their homes to secure business capital face an increasing risk of a credit crunch, with residential valuations falling and lending restrictions and interest rates set to increase, Australian Invoice Finance (AIF) says.
The invoice-based funding specialist warned that what once seemed an easy source of capital for small businesses could turn out to be more restrictive and expensive than ever thought. This followed the value of Australian capital dwellings in New South Wales and Victoria falling for the sixth consecutive month in April 2018.
“The average value of Sydney houses has fallen 3.4 per cent over the past year. If this downward trend continues as borrowing costs rise and APRA demands tighter lending standards following the Royal Commission, small business owners may regret using their home as a bank and mixing their personal and business lives in this way,” AIF Managing Director, Greg Charlwood, said.
“With interest rates widely expected to rise, servicing the cost of a business loan on a residential property will increase, reducing business revenue yet the business owner may not be able to borrow more if he or she hits a tough spot and needs more working capital. Business is uncertain enough without the added worry of whether you will have credit available when you most need it,” he added.
Charlwood said the owners of smaller businesses need to look beyond traditional funding sources that required them to risk their family home as a guarantee of ongoing success. He added that a simple funding solution that did not require property-secured loans is invoice financing. This alternative financing solution provides businesses with upfront cash payments against account receivables, helping to smooth out cashflow volatility and overcome issues while satisfying short-term financial obligations, he explained.
“We understand the importance of recognised revenue and how SME businesses experience difficulty in attaining proper credit without substantially increased risk. Interestingly, our global research shows that SMEs in other parts of the world, including Europe, are becoming equally concerned and invoice financing has been one of the fastest growing financial products for businesses worldwide in recent years,” Charlwood said.