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SMEs turn back on banks to fund growth

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The proportion of Australian SMEs that plan to fund their business growth via their main bank has halved in the past five years, according to new research.

In its upcoming SME Growth Index for September 2019, which saw banking analysts East & Partners survey more than 1,000 Australian businesses, SME financier Scottish Pacific found that more SMEs intend to fund growth using non-bank lenders than ever before.

Indeed, according to Scottish Pacific, this is the first time that the survey has shown that SMEs would use a non-bank over their main bank to fund growth.

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The data, collected by East & Partners on behalf of Scottish Pacific, shows that 18.7 per cent of SMEs intend to utilise non-bank funding to grow their businesses in the 2019 financial year, compared to 18.3 per cent preferencing traditional banks.

Additionally, the number of SME respondents claiming they would not consider using a non-bank lender has dropped from 4 per cent last year, down to 2.6 per cent currently.

Scottish Pacific CEO Peter Langham noted that the number of business owners planning to fund their growth via their main bank has more than halved in the five years of reporting the index, from 38 per cent in 2014 to 18.3 per cent now.

The results emulate findings from the Australian Banking Association (ABA), which found that the number of small business finance applications to banks have declined by one-third over the last five years, prompting its chief Anna Bligh to declare that banks are still open for business.

It comes as fellow non-bank business lender OnDeck revealed that loans coming to it from Australian finance brokers surged by 70 per cent over the past year.

Why are SMEs turning away from banks?

East & Partners banking analysts had predicted that non-banks would surpass main banks as SME-favoured funders in 2020; however, this was achieved earlier than anticipated.

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The research found that one of the main reasons for SMEs turning away from the banks was the desire to avoid using property security against new or refinanced loans.

This was highlighted as the response for 21.3 per cent of SMEs, up from 18.7 per cent in September 2018.

Other reasons cited for favouring a non-bank lender included avoiding personal guarantees/using non-property assets (19.9 per cent), reduced compliance paperwork (19.8 per cent), shorter application times (17.1 per cent), royal commission disclosures (8.8 per cent) and banks’ credit appetite (6.9 per cent).

Additionally, the research uncovered the most popular ways in which SME owners use finance to fund their growth.

The most popular finance product used by SME respondents was invoice finance (also known as debtor finance), which was utilised by 77 per cent of the studied SMEs.

Other popular products included merchant cash advances (used by 23 per cent of respondents), P2P lending (used by 10 per cent), crowdfunding (9 per cent), and other online lending (5 per cent).

Speaking of the findings, CEO Peter Langham said: “While it’s pleasing that business owners are increasingly aware of options outside a property-secured bank loan, the SME sector still has a long way to go in taking advantage of the alternatives available to them.

“This is highlighted by the fact that when it comes to funding growth, overwhelmingly, SMEs opt to put their hands in their own pockets – 83 per cent of business owners say this is how they plan to fund revenue growth.

“Some business owners remain unaware of funding alternatives. There’s a much larger group of SME owners who are aware of non-bank funding but don’t fully understand how it works. They are too busy to research it, so put this in the ‘too hard’ basket. When they can’t secure bank funding, they just tip their own money in to fund growth.”

Mr Langham added: “There are smarter ways to fund long-term business growth. We’re working with the relevant government bodies, SME advisers and SMEs themselves to try to increase Australian business owners’ understanding of a range of different ways to fund their enterprises.”

Mr Langham’s comments on business awareness of funding options come two months after Scottish Pacific, in partnership with the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), launched two business funding guides – one for businesses and another for their advisers, such as accountants, in a bid to highlight the various finance options now available to SMEs.

The ABA and the Council of Small Business Organisations of Australia (COSBOA) also launched their own finance guide earlier this month at the National Small Business Summit in Melbourne.

Hannah Downling

Hannah Dowling is a cadet journalist for The Adviser and Mortgage Business.

Prior to joining Momentum Media, Hannah worked as a content producer for a podcast catering to property investors. She also spent six years working in the real estate sector at a local agency. 

Email Hannah at: This email address is being protected from spambots. You need JavaScript enabled to view it.

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