Business propped up by credit cards

Thursday, 28 April, 2016

Business propped up by credit cards

Up to two thirds of Australian SMEs are resorting to using personal finances to prop up business growth, according to the latest SME Growth Index released by business finance specialist, Scottish Pacific (SP).

According to the firm, 17% of businesses do so regularly, with 48.4% saying it is an occasional practice. Only 10% of business owners identified as never having done so. The SME Growth Index surveys 1200 Australian businesses twice-yearly to determine growth prospects and concerns. The most recent survey found that personal credit card use was common, which SP claims has a significant impact on operations and the rate at which a business can expand.

CEO Peter Langham says that cashflow management needs more than short-term thinking and that businesses need to consider alternate funding options.

“Personal finance may appeal from a convenience, speed and accessibility perspective — the downside is that higher-than-necessary funding costs cut directly into margin, and personal financing can impact on lifestyle and leave owners open to family conflict which can destabilise the business.

“I’d strongly encourage SMEs, whether product- or service-orientated businesses, to seek smarter funding options. Look beyond the banks, as this is an active, innovative space trying to offer a better alternative.”   

Langham said another significant finding was that SMEs were more than willing to pay higher rates to obtain finance if it meant they didn’t have to provide real estate security.

“This reflects a growing awareness amongst SME owners that putting the house on the line is no longer a given and suggests openness to alternative, innovative funding solutions such as trade and debtor finance.

“This is key for up-and-coming entrepreneurs who have great ideas but may not own any real estate.”

Despite the rise of online and automated funding solutions being offered for SMEs, he said it was worth noting the high importance SME owners still place on being able to talk directly to the lending decision-maker and feeling that the funder was an expert who could provide guidance and support, not just dollars.

Other findings from the March 2016 index include:

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 Australian dollar).
  • 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%).
  • 70.6% of SMEs believe their business to be stable or in a growth phase, 11.3% in start-up 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’.
  • There has been a sharp rise in growth SMEs who believe conditions of credit are a key barrier to success, rising from 57.3% a year ago to 62% — almost equalling the perennial top bugbear of high or multiple taxes (62.7%). Concerns about red tape are also increasing (a key barrier for 56.5% of SME owners, up from 53.8% a year ago).
  • New product development plans have stalled. One in five SMEs plans to introduce new products in 1H 2016 (19.6%), down 7.1% since 1H 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% of SMEs.

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 (for example, 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% of SMEs.
  • 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. 
  • The ability to talk directly to the lending decision-maker was also deemed 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.

Image credit: © Hiam Lim

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