The significance of financial access for SMEs to Australia’s economy
Published on 2020-02-26
Category: Business Loans, Business Growth, Business Strategy
“Small business – too big to ignore” went the slogan of the movement championed by the NSW Business Chamber and its state and federal counterparts, in the lead-up to the 2013 Australian Federal Election. Holds true even now.
The SME (Small and Medium Enterprise) sector has become a significant contributor to Australia’s economy. It contributes to nearly half of the total employment in selected industries in our country, and one-third of our Industry Value Added (IVA)*.
We’ve seen that many of the most innovative companies in the country are small businesses, with their agile methodologies, digital innovation and the ability to scale quickly.
What are some of their key challenges?
Transition to profitability, changing government regulations, employee loyalty, and most importantly cash flow and funding are some of them.
Access to finance - One of their biggest concerns
Small businesses need to pump in the capital and secure funds at regular intervals. They battle with the constant challenge of keeping their payables and receivables in control. They need quick and easy access to money to fund their fast-paced expansion plans - to make big recruits, open new stores, or spend on equipment and inventory, often before earning revenue on products and services. They also need a healthy cash flow to support daily operations and to fuel future growth.
When they start off, most small businesses rely on personal funds and borrowing from friends and family.
Why is this so? Primarily because they face several challenges in borrowing from big banks.
Let’s have a look at some of them.
- Tough qualification criteria: SMEs struggle to secure funds from banks, thanks to stringent qualification criteria including high credit ratings, and demand for real estate as collateral. Small businesses usually don’t want to use the property to secure loans.
- Time-consuming: The application process for borrowing is cumbersome with lengthy documentation procedures. Banks can take a long time to decide whether to lend or not – this is a real problem for SMEs who have time-sensitive projects and opportunities to work on.
- Risk-averse lenders: Lenders on the other hand prefer big corporations over small businesses due to the risky nature of unsecured finance. Small business owners often use their personal credit cards in the early stages of their ventures.
- Higher interest rates: There are also differences in the interest rates paid by bigger companies and riskier small businesses, obviously constraining the latter’s investment.
All this impacts SMEs in many ways - delayed delivery of services, delay debt repayments, delays in buying capital-intensive equipment, delayed hiring and so on.
If this restricted access to capital and cash flow continues, it will be a serious concern to the economy. Remember, a significant section of the population is employed in SMEs. Continued tightening of credit to the sector can cause a downtrend in the economy.
Unlocking unconventional sources of capital - Unsecured, alternative lending
With big financiers still reluctant to lend to small businesses, SMEs are forced to look for innovative funding sources to thrive and gain a competitive edge. Thankfully there is a fast-growing trend of non-traditional, innovative financing options apart from traditional banking who often lend without security. These include instant approval loans, factoring or advances, trade creditor loans, equity loans, invoice finance, and secured and unsecured loans.
The number of lenders providing unsecured, alternative funding is on the rise. They have streamlined processes asking for far less information, allowing quicker processing and expedited application and approval processes that can happen in as quick as a day’s time. They focus on relationship banking understanding the nuances and specific requirements of SMEs. The interest rates, however, will be higher than bank rates. Many mortgage brokers also have been urged to diversify into the SME lending space.
In our opinion, SMEs should continue to pick smart options such as small business loans to kickstart projects hire experts and to fund expansion plans.
What does the future hold for SME finance?
With bank dealing issues with SMEs brought to light during the royal commission, we should anticipate a wave of methodical regulatory changes in this space.
From the SME angle, we anticipate a continued rise in understanding and acceptance of alternative lending options. Most small businesses now view them as a prime option, instead of a secondary one to be used only if big banks fail them.
SMEs must keep a close watch of the developments in the unsecured lending space in the next couple of months. They should structure funding in such a way that the business’s future, taxes and future borrowing of funds are not adversely affected. In short, they should evaluate all options based on long- or short-term requirements, and come to an informed decision that supports overall business strategy.
* Source: Parliament of Australia, Research paper on Small business sector contribution to the Australian economy Link
Tagged in: Small Business Loans, Alternative Lending, SME Loans, Small Business Owners, Australia’s Lending Economy, Secure Funds, Innovative Financing Options, Invoice Finance, Secured and Unsecured Loans, Alternative Funding, SME Lending, Alternative Lending Options
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