“When it’s good it’s very good, and when it’s bad it’s terrible” – these are the two extremes many SME business owners are experiencing, as highlighted in the latest Scottish Pacific SME Growth Index results.

At the positive end of the spectrum, in a promising rebound of confidence more small businesses are predicting revenue growth than at any time since early 2016. Around 51 per cent are expecting a revenue boost, of on average 4.5 per cent.

The other end of the spectrum is more concerning – those small businesses who are struggling are having a tougher time than at any stage over the past four years. Of the 1200 businesses responding to the SME Growth Index, 25 per cent are predicting static revenue over the next six months. The 24 per cent who expect revenue to decline is much higher than the 13 per cent in a similar position in 2014.

Tellingly, the current revenue decline average of 6 per cent has ballooned from a 4 per cent average in 2014, and the range of decline (now 4.8 per cent to 13.7 per cent) has significantly widened. In that same timeframe, the percentage of consolidating/contracting SMEs has doubled.

Given these statistics, it’s no wonder SMEs are exhibiting heightened concern around cashflow issues. SMEs are being squeezed at both ends, with suppliers reducing payment terms and customers paying later.

Whether an SME is predicting growth or struggling to maintain their current position, they need strong cashflow and the sector is hungry for working capital alternatives that meet their business’ needs.

The SME Growth Index highlights the continuing trend of business owners looking beyond bank lending to fund their growth. Fewer than one in 10 SMEs would prefer to use property to secure a business loan.

Alternative lenders are firmly on the SME radar, driven by fast credit approval turnaround times and streamlined compliance requirements.

The most popular alternative funding choices were: invoice finance (used by 77 per cent), merchant cash advances (23 per cent), P2P lending (10 per cent), crowdfunding (9 per cent) and other online lending (five per cent). Only four per cent of SME respondents said they would never consider using a non-bank lender.

Business owners seem to be seeking a little or a lot – more than a third of SMEs need funding of $50,000 to $250,000, another third are seeking $500,000 to $2million and one in five need less than $50,000.

Throughout the four-year history of the SME Growth Index, the most consistent finding has been the incredibly high number of business owners relying on their personal funds to invest in the business (always around 89 per cent). For many of these businesses, there are better options for funding growth.

With three quarters of SMEs telling us they put in 50-80 hour weeks, many just may not have the time to dedicate to researching appropriate funding options. I’d encourage business owners to ask themselves “is my growth being stunted by a lack of working capital?”. If the answer is yes, talk to the different alternative lenders.

The nature of the relationship between financier and SME is critical, so ask questions to get a feel for which providers will be there for the long haul, will work hard to understand your business and be able to provide funding no matter where you sit within the economic cycle.

Wayne Smith, Head of Debtor Finance, Scottish Pacific

• 79% of SMEs say cash flow issues cause the most sleepless nights, up from 73% in 2016. The opportunity cost of poor cash flow is staggering. With an average 17% revenue hit estimated by SMEs, East & Partners have extrapolated that poor cash flow costs the SME sector A$234.6 billion in 2017.
• SMEs are being squeezed at both ends, by customers increasingly paying late (a major issue for 31% of respondents) and suppliers cutting payment terms (the key stress factor for 19%).
• The issue that most impacts on cash flow continues to be red tape and compliance (nominated by 73% of SMEs and focused around BAS, the Fair Work Act and company tax concerns).

Cash flow is an increasing problem for the sector, and business owners are really putting in the hard yards (on average, spending 66 hours a week working on or in their business).

“Many business owners are cash-strapped, time-poor and confused about the options available to them to fund their growth,” Mr Smith said.

“With a declining property market and banks exercising caution, the concern is that a lack of credit could hamper growth prospects. Business owners will need to consider funding alternatives to traditional property secured lending. Those SMEs who find alternative ways to fund growth and master cash flow management will have a clear advantage over their competitors,” he said.

Continuing the trend of SMEs looking beyond banks to fund growth, 96% could name a key reason to borrow from an alternative lender, with fast credit approval and reduced compliance the main drawcards.

Almost one in 10 business owners (8%) say revelations from the Banking Royal Commission will prompt them to seek out non-bank alternatives.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, said today that Scottish Pacific’s latest SME Growth Index identifies the issues most raised with ASBFEO by SMEs across 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,” Ms 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. We’ve done considerable work in this space, recently releasing our Affordable Capital for SME Growth report and Borrowing from fintech lenders guide.”

• SME owners don’t clock off. Despite technical and digital innovations, more than 40% of business owners put in 60-80 hours a week on the job and one in five clock 80+ hours a week.
• Two-thirds of SMEs said their major cause of sleepless nights is not having enough time in the day to get everything done. This was the second biggest SME issue, only cash flow caused more concerns.
• A growing number of SMEs (25%, up from 17% in 2016) are worried about the potential for sudden disruption of their business model.

• More than a third of respondents (37%) identify as growth businesses – and they are really feeling the pinch from cash flow issues. 59% of growth SMEs are seeking additional finance to fund projected growth, with one in three looking to borrow $50,000-$250,000 and a similar proportion seeking $500,000-$2million.
• About one-quarter of SMEs expect revenue to hold steady, and one-quarter expect revenue to decline, by an average of 6%. For those predicting revenue decline, the range (5-13.5%) is almost double that of 2014.

By far the most common way for SMEs to fund growth is to use their own funds (89%), ahead of borrowing from their primary bank (23%), using alternative lenders (15%), taking on new equity (13%) and borrowing from secondary banks (10%).

“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. Why are so many SMEs using inflexible, debt such as personal credit cards instead of more sustainable funding solutions that would allow them to grow without such intense cash flow pressures?” Mr Smith said.

Scottish Pacific (ASX:SCO) is Australasia’s largest specialist working capital provider, who for 30 years have been lending to the owners of small, medium and large businesses, with revenues ranging from $500,000 to $1 billion. Access a free copy of the SME Growth Index at www.scottishpacific.com/news/research

Media contact:
Kathryn Britt