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Our Scottish Pacific SME Growth Index is a twice-yearly snapshot of Australia's small to medium sized business sectors showing cashflow issues that many businesses face today, below is one of six key insights found in our September 2019 report:

For the first time in five years of the SME Growth Index, SMEs say they are more likely to fund growth using a non-bank lender rather than their main bank.

SPC11500 SME Growth Index Social Visuals AW

East & Partners had forecast in the March 2019 SME Growth Index that this transition would occur before mid-2020, but the threshold has been crossed in 2019. It appears SME funding plans are shifting quickly.

Banks have consistently lost ground each round since twice-yearly Index reporting began in 2014. At that stage 38% of SMEs preferred their main bank for growth funding – this has now halved to 18.3%.

The record high preference for non-bank lending indicates 18.7% of SMEs plan to fund the next six months ’ growth using a non-bank.

Only 2.6% of SMEs would not consider using a non-bank lender, down from 4% last year. Almost one in 10 SMEs don’t know how they will fund investment and are open to ideas.

The dominant way to fund growth continues to be owners dipping into their own funds, the choice for 83% of SMEs. This is despite other business funding options being available that would allow them to save their own funds for personal investments.

Recently released Australian Banking Association research, highlighting that small business loan applications to banks have declined by a third since 2014, supports SME Growth Index findings showing a move away from the banks when it comes to funding SME growth. The ABA research pinpoints access to funding as the key restraint to starting a small business.


Why SMEs are turning away from banks

The key reason for SMEs turning to non-bank lenders, according to SME Growth Index findings, is to avoid property security (21.3% of respondents nominated this, up from 18.7% in September 2018).

This is in light of Australia’s less than buoyant property market and uncertainty about whether the housing price correction has run its course, along with Census data that highlights a slow but marked decline in levels of home ownership since the early 2000s.

The entrepreneurs of a future Australia, especially those based in Sydney and Melbourne where the property market has taken the biggest hit, will certainly have to look beyond the family home or their other property to fund their businesses.

This round, 19.9% of SMEs independently nominated that another reason they are turning to the non-banks is to avoid using non-property assets or personal guarantees to fund their business.

Repercussions from the Banking Royal Commission are still resonating with the small business sector.

Almost one in 10 (8.8%) said Royal Commission disclosures on misconduct in the banking sector was the reason they use non-bank lenders to fund their growth.

The impact of the Royal Commission might also account for the significant increase in SMEs citing a lack of bank appetite to provide them credit.

This was the key reason 6.9% of respondents gave for turning away from bank-based borrowing – a proportion which has doubled from 3.2% last year. One in five SMEs say they look to non-bank lenders to avoid banks’ onerous regulatory and compliance requirements.

Almost one in five are attracted by fast credit approval turnaround times and capital being available quickly. This figure has fallen substantially from previous rounds, perhaps because business owners now expect fast approval by non-banks and are finding other factors to induce them to look beyond the banks.

According to East & Partners Head of Markets Analysis, Martin Smith, despite SMEs historically lacking the time and resources to shop around for business finance, the rising demand for non-bank lending options to fund new growth investment reflects the reality that there is now a broader array of non-bank lending alternatives to match business owners’ funding requirements.

Like to know more? To download the latest copy of our SME Growth Index, click here.

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