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SME Finance Solutions That Don’t Involve Property Security


Scottish Pacific’s March 2019 SME Growth Index unearthed many interesting findings. One of the main themes involves property security and its negative impact on business funding.

In this post, we’ll examine the overarching sentiment toward property security and offer solutions for companies who don’t wish to put up personal collateral to obtain capital.


Property Downturns Affecting SMEs

Home prices have been plummeting throughout much of Australia, extending far beyond just Sydney and Melbourne. Home prices fell dropped a further 0.7 percent in January 2019, putting them at nearly seven percent lower than their peak, writes ABC News

Bloomberg even goes so far as to call it, “Australia’s worst property slump in a generation.”

This has had some unsavory side effects, including more than a six percent drop in home loans in December 2018 and a long-term downtrend in the overall home ownership rate.


More Difficulty Getting Funding

“The Productivity Commission reports that around a third of all small business lending by the major banks is secured by real estate,” explains CEO of Scottish Pacific, Peter Langham. “Outside of the majors, the share of small business lending secured by residential property is higher, with almost 47 percent of small business loans by value secured by residential property.”

But as you might imagine, property downturn trends are something that’s starting to affect many companies from a business funding standpoint. In 2018, 45 percent of business owners reported that softening housing prices were making it more difficult to access business capital, and an additional 35 percent believed they will be impacted in 2019.

“When we last assessed the impact of the property market in September 2017, three out of four SMEs said property prices were having no direct impact on their businesses,” Langham says. “In the March 2019 SME Growth Index research, only one in five SMEs said they had not seen a direct impact.”

Further research found, one in five SMEs said it was harder to access business funding in 2018, and one in five said it will get harder to do so in the future.

Victoria’s feeling it the worst with 48 percent of business owners being affected, followed by NSW at 46 percent and Queensland at 39 percent.

And with entrepreneurs increasingly likely to rent rather than buy a home in the near future, many will have no choice but to consider borrowing capital against other assets besides property.

Using property as collateral simply isn’t as viable as it once was. “For any business owner who feels compelled to rely on providing property as security for their business loans, the credit squeeze may well be on,” the SME Growth Index reports.’

“For these non-growth SMEs, finances are already stretched thin, and now with the property market impact kicking in they are feeling ‘when it rains, it pours.’ These are the businesses that currently need the most support to get through the tough market conditions,” Mr. Langham said.


Frustration with Property Security

Having to use property as collateral to access funding was cited as being the second biggest frustration among business owners in 2018. In fact, 78 percent of SMEs said it was their top frustration, which was second only to loan conditions at 80 percent.

As a result, business owners are willing to do a lot to avoid using property as collateral.

Many are looking for other options, and according to the SME Growth Index, “more than 91 percent of SMEs would be prepared to pay a higher rate to obtain finance if they didn’t have to provide real estate security.”


Business Financing Alternatives

Fortunately, there are other ways to go about it than relying on property security, and SMEs have more options than ever.

Here are four potential solutions you may to consider.

Peer to Peer Lending

Unlike traditional loans where you go through a bank, peer to peer lending cuts out the middleman. It’s an online system that allows lenders and borrowers to connect digitally, with each having their own specific criteria.

Business owners look for funding with better terms than they can find through their local bank, and in this case, obtain without property security. Lenders look to invest money at higher returns than they would receive through other means.

Because peer to peer lending is done electronically and doesn’t involve conventional banking, loans can often be procured quickly, making it ideal for SMEs who need money in a hurry.

For more information on peer to peer lending and platform reviews, check out this resource from Canstar.


Short-term Loans

This is a newer form of financing where a company is given a loan typically ranging anywhere from $20,000 to $250,000 that must be repaid within a short period of time. Loan terms vary but will generally be from one to 72 months.

Like peer to peer lending, loan approval happens quickly, often within a day or two.

Short-term loans are usually unsecured. And while some lenders may take over company assets in the event of a default, they won’t take real estate, meaning your home is safe.

The main drawback of this financing option is the high rates and fees that tend to come along with it. That said, it definitely works well in certain situations for SMEs that feel comfortable repaying a loan quickly but don’t want to deal with the burden of using property as collateral.


Debtor Finance

If slow or late paying clients is creating a cash flow gap, debtor finance, or invoice finance can be an effective solution that works on a simple premise.

You use unpaid invoices as collateral to receive a cash advance. For example, Scottish Pacific offers up to 80 percent on each approved invoice, less associated fees. You receive the rest of the money once your client has paid in full.

You’re essentially expediting the payment process and don’t have to wait 30, 60, 90 or even 120 days to get paid. Because your unpaid invoices serve as collateral, most lenders don’t require any property security.

There are also multiple debtor finance options available. For instance, you can let the lender assume responsibility of tracking down unpaid invoices or handle it in house if you don’t wish to disclose the fact that you’re obtaining financing to clients.

Or if you only need financing on occasion — say you run a seasonal business or encounter an unexpected expense — you use selective invoice financing without any long-term commitments.

It’s a very flexible option.

“With Productivity Commission data showing 35-50 percent of Australian SMEs rely on property security to fund their businesses, we believe that too many business owners remain unaware they can use balance sheet assets as security instead of property — assets including equipment and invoices issues,” adds Langham.


Business Credit Cards

Like short-term loans, these tend to come with high interest rates. However, they’re often fast, convenient and don’t require any property security. And if you have good credit, there are a wide array of business credit cards to choose from.

While this may not be the best option if you need a massive amount of funding (e.g. hundreds of thousands or millions of dollars), it certainly can be if you simply need some extra cash flow or get hit with an unexpected expense.

Business credit cards also offer plenty of flexibility, allowing you to pay for goods or services both large and small. Whether it’s covering the cost of an important vendor order or simply paying utility bills, you always have cash at your disposal.

This guide from Finder compares some of the top business credit cards for quick reference.


Exploring Your Options

Property downturns in Australia have created some real concerns for business owners seeking financing. And judging by recent statistics, it’s an issue that isn’t likely to change anytime soon.

Luckily, there are other ways to obtain business funding that don’t involve property security.

“One of the key benefits small business owners find in many of the alternative lenders, including Scottish Pacific, is they don’t have to provide their family home as security,” explains Langham. “This unshackles the family home from business growth and frees it to be used in other ways to secure their personal financial futures.”

Understanding the top alternatives and how they work should help you find a solution that works for your company.

To learn more about business finance and talk to an expert, call 1300 177 485 or contact Scottish Pacific today.

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