If you’re a small business owner whose funding is tied to property security, the rumblings in the housing market may be making you uncomfortable about how you’ll fund growth.
Growth SMEs say if their cash flow had been better they would have increased their revenue by, on average, 27% – instead, they struggled for the funds to hire staff, buy equipment or move into new markets.
Having an overdraft tied to a static or decreasing asset limits the amount of capital you can access to grow your business.
Our September Scottish Pacific SME Growth Index shows that when it comes to breaking free from property security, business owners are starting to take note – fewer than one in 10 said they would prefer to use property as security. SMEs named loans secured against non-personal assets as their preferred way to fund growth.
The SME Growth Index found that confidence in the SME sector is at a two-year high. Just over half of the 1200 businesses polled are forecasting positive revenue growth, predicting an average revenue increase of 4.5%.r to use property as security. SMEs named loans secured against non-personal assets as their preferred way to fund growth.
With growth comes cash flow issues.
It is timely for business owners to consider whether a cash flow issue, or the deeper issue of tying business funding to property security, is holding them back.
Cash flow improvement tips
We work closely with businesses in a wide range of industries across Australia, New Zealand and the UK, so we have a good understanding of the cash flow strategies that work for them.
These strategies include invoicing early, being proactive with late payers and offering more ways to pay.
For a whole range of cash flow management tips, download our easy to read guide.
Limitations of property secured funding
If you need a larger injection of funds to fuel your business growth, simply tidying up your cash flow might not cut it. Now is a great time to look beyond property secured funding.
Analyst CoreLogic’s July Home Value Index reports Australian property prices have experienced their largest annual fall in value since August 2012, with five of the eight capital cities, including Sydney and Melbourne, slipping in value.
This trend is likely to be reinforced by tighter lending conditions and other outcomes from the Royal Commission into Banking.
All this could have a significant impact on the growth prospects of the vast number of SME owners whose funding is linked to the value of their property security.
Having the family home tied into business borrowings and having to renegotiate with the bank any time you need to increase facilities to fund growth can be stressful and distracting for business owners.
There are other options available where funding available grows in line with business revenues.
Alternative funding options
Analysts East & Partners predict non-bank lenders will emerge as a viable alternative for SMEs struggling to balance business growth aspirations against the impact of a slowing housing market.
The incentive of not having to lend against a business owner’s ‘bricks and mortar’ residential home is a major advantage of using alternative lending.
So, let’s take a look at some of the non-bank funding options.
SME Growth Index research shows that invoice finance is by far the most popular of all the alternative lending options (nominated as preferred option by 77% of business owners ahead of preferences for merchant cash advances of 23%, P2P lending 10%, crowd-funding 9% and other online lending 5%).
Secured against receivables loan – also known as invoice finance or debtor finance, this option is similar to an overdraft, but instead of using bricks and mortar, the security is your invoices. This is an attractive option for growth businesses needing to bridge a cash flow gap that sell on credit terms. You receive an advance on invoices already owed and the funding available grows in line with sales, rather than being limited by the value of real estate that is unrelated to the business. Having cash flow certainty means you can negotiate supplier discounts for early payment or take on big new clients confident that purchases can be made and staff paid.
Selective Invoice Finance – Perfect for short terms or urgent funding, this is similar to receivables finance but instead of funding your whole invoice book, you can pick and choose what invoices you want funded. It’s a great way to see if receivables finance suits your business, and it is also a popular option for seasonal businesses.
Trade finance – Is a flexible short-term borrowing facility that allows business owners a means to purchase stock linked specifically to an import or export transaction.
P2P/Crowdfunding – present your idea online and get potential customers or others who like your idea to invest in it. The Federal Government has a handy resource to see if this is a potential way to fund your business idea.
Equity finance – money is provided to you in return for a share in owning your business. The advantage of this option is that it does not incur debt that needs to be repaid (but the part-owner will take a share of your profit). This can also be a great way to bring new skills and insights into your business. But it also takes time and money presenting to investors and keeping them happy.
Online unsecured business loan – the new breed of online lenders offer advantages such as faster access to money, with less stringent loan conditions, compared to the banks. Because the money is unsecured, this access comes with higher rates and fees.
To find out in more detail about these options, ASBFEO has a guide to alternative lending.
These alternatives to property secured funding would also be attractive to millennials or other entrepreneurs who may not have property to provide as collateral – this will be an increasing issue as the “smashed avocado” generation matures into business ownership and home ownership rates continue to fall.
In light of the latest SME Growth Index results, there’s a concern that the relatively weak outlook for capital growth in property could put the brakes on the emerging positivity around SME growth prospects.
If the growth outlook is great for your business, don’t let your funding be limited by property security.
To download the latest copy of our SME Growth Index, click here.