More than half of Australian SMEs may be forecasting improved revenues, but they need to overcome cash flow and property market issues in order to reach their growth potential, according to the latest Scottish Pacific SME Growth Index.
Conducted independently by market and research analysis firm East & Partners, the researchers interviewed more than 1,200 SMEs across all states and major industries with $1-20m annual revenues.
In a statement, Scottish Pacific senior executive Wayne Smith said that 51% of businesses predict positive revenue growth in the next six months. “The average projected revenue increase of 4.5% is the most positive sentiment since 2016 and reflects a promising rebound in underlying business confidence within the SME sector,” Smith said.
However, a prosperity gap continues to grow among SMEs, with those performing poorly in “significantly worse shape than they were four years ago”.
According to Smith, many business owners are cash-strapped, very busy and confused about available options to fund their growth. The concern is that the lack of credit caused by the falling property market and cautious banks could hinder growth prospects.
“Business owners will need to consider funding alternatives to traditional property secured lending,” Smith said. “Those SMEs who find alternative ways to fund growth and master cash flow management will have a clear advantage over their competitors.”
Of all the SMEs that are looking beyond banks to foster growth, 96% have a key reason for borrowing from an alternative lender, with fast credit approval time and reduced compliance requirement as primary drawcards. Almost 10% said revelations of the royal commission moved them to consider non-bank alternatives.
The Australian Small Business and Family Enterprise Ombudsman Kate Carnell recently said that the SME Growth Index identifies the leading issues brought up by SMEs all over the country.
“Extended payment times impact business cash flow, which is critical to SME day-to-day operation. Reduced cash flow impacts the ability to pay staff, superannuation and the quarterly BAS, and an overly complex workplace relations system inhibits employment, which in turn inhibits growth,” Carnell said.
“The Index also points out SMEs are looking at alternatives to banks to access finance, including invoice finance, fintechs, government grants and crowdfunding.”
Cash flow keeps SMEs awake
The index revealed that 79% of SMEs say cash flow issues leave them sleepless on most nights. With roughly around 17% of SMEs’ average revenue taking a hit, East & Partners extrapolated that the SME sector lost $234bn in 2017 due to poor cash flow. According to 73% of the respondents, red tape and compliance remain the issues that caused the most impact on cash flow.
For 31% of the respondents, “customers increasingly paying late” was a major issue; while for 19%, it was “suppliers cutting payment terms”.
Non-banks on the radar
Less than 10% of the respondents prefer to finance their business growth using property as security, and one in five cited “not having to borrow against property” as the main benefit of lending from non-banks. Due to national property market falls, SMEs with credits tied to property will find it increasingly challenging to fund growth.
Despite the SME lending landscape being dominated by the big four banks and their subsidiaries, merely 4% of SMEs say they would never consider taking a loan from an alternative lender. That is good news for the rising fintech industry and the long-established debtor finance sector that offer SMEs a wider range of funding options compared to banks.
Growth SMEs recorded a 2% drop in intention to fund business growth by borrowing from their main bank. The “bank borrowing intention” now sits at just below 23%, and continues to fall since the index started in 2014.
Over a third of respondents are “really feeling the pinch” from cash flow issues, and 59% of SMEs are seeking additional funds for their projected growth, with one in three looking to borrow $50,000-$250,000 and a similar ratio seeking $500,000-$2million.
About one-quarter of SMEs believe revenues will hold steady and one-quarter expect revenues to fall by an average of 6%. The range of predicted decline for those with falling revenues is between 5-13.5%, almost twice that of 2014.
According to the index, 89% of SMEs fund growth by using their own funds, 23% by borrowing from their primary bank, 15% by using alternative lenders, 13% by taking on new equity, and 10% by borrowing from secondary banks.
“It’s crucial to have reliable working capital, yet nine out of 10 SMEs reach into their own pockets to fund growth rather than use options that help them retain working capital within their business,” Smith said.