Business owners have many unanswered questions, fuelled by global uncertainty and with so many unknown factors about the remainder of 2020, let alone what lies beyond.
Questions such as: Are the old traditional forms of finance changed forever? And what of some of the newer funding options? For example, fintech lending, which has been spurred on over the past decade by excess capital in the markets. Will they suffer a temporary blip or will they disappear for a long time to come?
Coming out of the COVID-19 crisis, how will the banks act? Banks will need to regain their profits, but will their capital allow them to be as aggressive in lending as they have in the past?
There are many scenarios around how the small-business lending space will play out in response to the economic and political fallout from the pandemic.
Not just now, but even more so come September with the end of the initial JobKeeper life support scheme and the six-month bank moratorium on principal and interest payments.
Currently, owners have a pressing desire to find funding to keep SME businesses viable — but there’s little appetite to go further into debt doing so. Small-business advocate TheBankDoctor’s Neil Slonim has questioned what he says are the low numbers of new small-business loan applications, as well as the banks’ appetite to approve these applications, saying “many SMEs just don’t want to take on more debt”.
In Australia, the use of the family home as security for a business facility has been the norm for a long time and this type of SME lending has been supported by the federal government during the COVID-19 crisis, but it is not always the wisest choice for business success.
ScotPac’s latest SME Growth Index research, polling 1,200 business owners around Australia, shows that SMEs looking for funding place the most value on speed and ease, with around 90 per cent of business owners giving top priority to lenders who can offer them uncomplicated paperwork and the least burdensome administration.
The research, undertaken before the coronavirus made an impact in Australia, found even before the current economic crisis, around one in four small businesses (23 per cent) listed their main funding factor as literally taking any credit they can access, highlighting the difficult working capital constraints that are a daily factor for SMEs.
Inappropriate business funding solutions perpetuate working capital problems, and business owners who rely on their own funds or personal property security to fund growth need to find better ways to unlock capital within their businesses.
The research found that only one in 10 SME owners are currently protecting their personal assets, by using business assets such as invoices, company property or equipment to secure funding. Of those small-business owners not protecting their personal assets, 87 per cent are putting up the family home as security. Three out of every four SME owners are resorting to personal credit cards to keep their business functioning.
One of the outcomes of the COVID-19 pandemic could be a “hunkering down” by business owners to the “better the devil you know” form of secured business lending banks have long offered, with the family home the most commonly offered collateral.
However, many business owners don’t realise that they can use business assets — such as stock, outstanding invoices, equipment and commercial property — to keep their family home out of the funding equation.
If, indeed, the above scenario does pan out and business owners stick to the devil they know, then what are the chances of business owners getting the bank funding they need if and when house prices fall or if declining home ownership trends continue?
As the pandemic eases, will the banks come out swinging, looking to build their assets and lend to those businesses that are looking to expand after this crisis?
Business owners have always, on the whole, had a busy, live-for-the-day attitude — they tend to only deal with issues as they hit them.
There is a real risk, whether it’s in September or further down the track when the JobKeeper life support system is lifted from the sector, that Australia will endure a second wave of SME pain if businesses and their advisers don’t act now to secure appropriate lines of funding.
This is going to require them to look ahead from the “now” urgencies, and plan for the future.
No one business finance solution or provider is right for every business or situation.
Business owners should do their research about all types of funding options, keeping in mind a few universal truths: know what you’re signing up for, understand what you’re putting at risk to secure funding, and make sure you’re dealing with a reputable funder.
Beyond the banks, increasingly over the past decade, business owners have turned to the non-bank sector. Pre-COVID-19, there was an increasing number of new non-bank lenders to add to those of us who have been around for many decades.
In the COVID-19 environment, survival is the name of the game for many of the newer non-bank lenders as they experience their very first economic downturn.
Will these fintechs still be open for business beyond 2020? How will their shareholders and funders view their prospects, after the economy has been through the type of shock that occurs every 100 years or so?
Business owners can be assured there is a swag of non-bank lenders who will continue to be open for business. These are the ones who have been around for a long time; helped their clients through the good and bad extremes of many business cycles; are profitable and have experienced management teams, strong funding arrangements and strong balance sheets.
Governments, accountants, finance brokers and all who hold sway with small-business owners must do more to help them look at all options — the banks AND beyond — for business funding.
There are business finance companies with robust and sustainable processes, who are flexible enough to listen and help alongside the banks for so many small-business owners who otherwise — in the short-term, and potentially for years to come — will struggle to get the business funding they need.