Non-banks set to pass main banks in funding SME growth

FOR THE FIRST time in the five years and 10 rounds of the Scottish Pacific SME Growth Index, the number of SMEs who turn to their main bank to fund growth has dropped below the 20 percent mark.

The SME Growth Index research released today is conducted independently by banking analysts East & Partners, on behalf of national working capital funder Scottish Pacific.

In March 2019 Index findings, for the first time SMEs are about as likely to turn to an alternative lender as they are to ask their main bank to fund growth.

East & Partners predicts that, if the current trend continues, by the second half of 2020 alternative lenders will overtake SMEs’ main relationship banks as the key funders of new SME business investment in Australia.

Scottish Pacific CEO Peter Langham said there were many reasons behind this trend, including banks’ credit conditions tightening, business owners looking for more flexibility and funding that allows them to grow, as well as the tightening property market and SMEs’ dislike of having to use property as security for their business loans. 

“Small business owners traditionally have been ‘rusted on’ to their banks, but they are becoming increasingly open to non-bank alternatives to fund their operational and strategic growth needs,” Mr Langham said. 

"Scottish Pacific has been helping business owners for 30 years and we continue to grow. The main change we've seen in the non-bank lending environment recently is that we are funding larger deals.

“The research shows that when it comes to funding growth, traditional bank borrowing keeps trending downwards, as more businesses ‘shop around’ for a customised funding solution.”

The research was conducted from November 2018 to January 2019, after publication of the Royal Commission into Banking’s interim report and during the last round of its public hearings.

This round, significantly fewer SMEs, when asked “how are you going to fund your expected business growth in the next six months?”, said they’d approach their main bank (19.5%, a drop of more than three percentage points from September 2018).

When polling began in September 2014, just over 38 percent of SMEs were turning to their main relationship bank to fund their planned growth.

The biggest gains were made by the non-bank lending sector, the first choice as funders of growth for almost 18 percent of business owners (up from 15 percent six months ago).

This trend towards non-bank lending is supported by data showing that many of those not using non-bank lenders in 2018 were open to do so in the future. In March 2018 43.5 percent of SMEs said they wouldn’t consider using non-bank lending. Twelve months on, not even one-third of business owners are in this category.

MOST POPULAR ALTERNATIVES

The most popular alternative finance product nominated by SMEs to fund their growth in 2018 was trade and import finance (currently used by almost 33% of all businesses polled), followed by debtor or invoice finance (9%), with fintech and other funding methods used by 5.8 percent of the 1257 SMEs surveyed.

Few businesses in the $1-20m revenue category are using merchant cash advance (2.5%), peer to peer lending (1.4%), crowd-funding (0.9%) or other online lending options (0.7%), Mr Langham said.

About 96 percent of SMEs are drawn to alternative lenders mainly because of fast credit approval and reduced compliance, and the advantage of not having to borrow against the business owner’s home. Growth SMEs are five times more likely than non-growth SMEs to use an alternative funder in preference to a bank.

He said despite the gains into the SME market made by non-banks, there was still room for sector growth.

“Two-thirds of SMEs said they did not use non-bank lending options in 2018, but more than half of these said they’d be open to it in the future,” Mr Langham said.

FRUSTRATED BY PROPERTY SECURITY

One of the big advantages of alternative lending is that in most cases, business owners don’t have to put the family home up as security.

“Alternative finance is building momentum, underlined by the clear reluctance of business owners to borrow against property. The SME Growth Index found that nine out of 10 SMEs would be willing to accept a higher interest rate if it meant they didn’t have to provide property security.” Mr Langham said.

For the twice-yearly SME Growth Index, the owners, CEOs or senior financial staff of 1257 SMEs across a range of industries and all states, with annual revenues of $A1-20 million, are surveyed and interviewed.

Other key findings this round:

* A high proportion of SMEs relying on 'dumb debt' (such as personal credit cards) or owners' equity to fund new productive capacity - strategies that can actually limit new business investment opportunities.

* Business owners are more optimistic about growth than they have been for three years. More than 53 percent of SMEs are expecting to grow in the first half of 2019, at an average revenue increase of 4.9 percent.

* Regardless of any long-term financial services regulatory changes which may flow from the Royal Commission, in the short-term SMEs are already seeing an impact on their access to funding. More than half of all SME respondents say the Royal Commission has made it harder, or will make it harder, for them to access business funds.

 Click for full copy of SME Growth Index

 

About Scottish Pacific

Scottish Pacific is Australasia’s largest specialist working capital provider, helping thousands of business owners with the working capital they need to succeed. Scottish Pacific lends to small, medium and large businesses with revenues ranging from $500,000 to $1 billion. www.scottishpacific.com

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