Two in three Australian SMEs are trying new funding options

Jon Sutton Chief Executive Officer at ScotPac Business Finance

National research by leading SME non-bank lender ScotPac shows businesses are trying to move past COVID 19 with a strong trend towards introducing new types of funding.

ScotPac CEO Jon Sutton said the 2021 SME Growth Index results provide insight into how SMEs are building out of the pandemic, with 66.1% sourcing funding beyond what they usually use.

There is a rapid rise from the start of 2021 when only 46% were introducing new funding.

“The fact so many SMEs tried new funding avenues shows they realise pandemic conditions are a longer-term proposition that they will have to adjust to,” Mr Sutton said.

ScotPac’s SME Growth Index is Australia’s longest-running in-depth research on small business growth prospects, polling 1255 small businesses from all states and key industries.

The top three reasons SMEs gave for seeking new funding sources were to buy plant and equipment (57.5%), improve cashflow (40.6%) and pay down debt (34.3%).

When asked the types of funding they had introduced over the past year to keep the business moving, 55.4% said they turned to owner funds, with 42.5% relying on personal credit cards.

“We’d encourage business owners, particularly if they are relying on personal credit cards, to seek professional advice about more sustainable funding options,” Mr Sutton said.

“Alternatives could also benefit SMEs funding their business from retained profits as reliance on retained profits can hinder growth, especially if you are facing rapid growth.”

Other common styles of new funding SMEs turned to over the past year include asset and equipment finance (38%) and government stimulus funds (27.6%).

Invoice finance demand has more than doubled since 2018: SMEs were likely to boost working capital using invoice finance facility (16.3%) as they were to take out a new overdraft (20%).

Too many SMEs having funding applications rejected

A third the SMEs didn’t try new funding due to application rejection. 47.3% who complained were split into those whose applications were rejected and those who were not refunded.

Other key reasons for not introducing new funding styles were the excessive admin or documentation requirements (28.5%) along with a reluctance to take on more debt (28%).

Only one in 10 SMEs had no actual need for additional (externa)l funding, highlighting the overly high unmet demand for working capital in the SME sector.

“Given the pandemic stresses placed on the SME sector, the onus is on financiers to make application processes and ongoing admin as easy and quick as possible,” Mr Sutton said.

“ScotPac has introduced cutting edge technology that allows us to ‘say yes’ to funding within hours and get capital into accounts within a day or so.”

Fastest growing funding methods for new investments

Non-bank lending and new equity are the fastest growing funding methods for new business investment, rising by 5% and 6% respectively since the September 2020 Index.

Well over a quarter of all SMEs (28.7%) plan to use a non-bank lender for new growth measures.

Looking purely at growth of businesses, the intention to use non-banks to fund new growth has doubled in the past three years to around 24.2% currently.

Not quite one third of Small and Medium Enterprises plan to fund new business investment using either their primary bank (17.2%) or a secondary bank (13.6%).

New business investment remains dominated by owners contributing their own funds (82%) despite the array of business funding methods options available.

However, it is notable that this percentage has dropped from 91% a year ago, with SMEs significantly reducing their use of owners’ equity for investment during the pandemic.