A decreasing rate of home ownership will shake up Australia’s long-term tradition of SME owners using their family home as security to fund their business. Millennials are an entrepreneurial generation and those looking to start businesses will have to seriously consider how to fund growth if they are locked out of the real estate market.
Australia’s home ownership rate is trending down – from an all-time high of 71.4 per cent in 1966, it is currently at 67 per cent and projected to decrease to 65 per cent by 2020.*
Already a growing number of baby boomer and Gen X business owners in Australia are moving away from bricks and mortar as business security. They are turning to non-bank alternatives such as debtor finance and angel investors to fuel their growth.
With many millennials expressing a sense of futility about saving for a home, and feeling priced out of the market, this will invariably impact the use of property as security for business working capital.
It’s an emotive topic, as seen by the recent “smashed avocado brunches versus home ownership” debate, but for the SME sector this is a big underlying issue.
Currently many SMEs fund their business by bank overdraft, using their property as security. If future generations of SME owners do not own property, they will need alternative methods to fund growth.
Start-ups and fast-growth businesses often find it hard to secure enough working capital to sustain growth. Growth can put an enormous strain on cashflow. We see it all the time – a business wins major new orders, but the frustration comes when they turn it down as they can’t wait up to 60 days to get paid, they just can’t fund the extra staff required or extra orders needed.
Those businesses looking to banks for overdraft facilities have to have enough equity and are invariably asked to provide real estate security.
There are more than two million small businesses in Australia, providing jobs for almost five million people (45 per cent of the workforce) according to Australian Bureau of Statistics data.
There has been a 25 per cent drop over the past two decades in the number of Australians owning their home outright. The property scenario is especially stark in capital cities such as Sydney. According to recent data from CoreLogic, more than two out of every five house sales in Sydney over the past year sold for at least $1 million. Just under one in five units (17 per cent) sold for at least $1 million.
The writing is on the wall: business owners need to find smart alternative ways to fund growth.
Debtor and Trade Finance can help property-free millennials fund their business
With more than 4000 Australian SMEs already using debtor finance, it is a viable business funding alternative for many SME owners, including those who may never own a house.
Debtor or invoice finance is attractive for businesses that sell on credit terms. The business is given an advance on money already owed, and the available funding grows in line with their sales rather than being limited by the value of real estate which, in the vast majority of cases, is unrelated to the business.
The other benefit with debtor finance, given funding grows in line with sales, is it cuts out the need to constantly renegotiate the funding limit.
Trade finance sees the funder paying for goods, giving the business up to 90 days to convert those goods in to cash and repay the facility.
Both debtor finance and trade finance give the business improved buying power, which allows them to negotiate supplier discounts for early payment and to avoid having to offer costly settlement discounts.
This strategy breaks a business free of the restrictions of bank covenants, and it works for a wide range of businesses. The facilities we provide range from $10,000 to $70million.
Our facilities do not rely on real estate as security, which makes it a very accessible and versatile form of funding.