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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:

SME Growth Index research over the past five years shows business owners are increasingly becoming aware they have options beyond the family home to secure funding for their business.

SPC11500 SME Growth Index Social Visuals AW6

They also clearly indicate that it’s their preference to not use property as security for business lending.

And yet...

And yet, the statistics also show that many are still not looking beyond property security or their own personal funds when it comes to funding their business growth. Why?

theBankDoctor’s Neil Slonim says that the answer to the conundrum comes down to the pressures small business owners are under.

According to Slonim, in their daily lives people have “important stuff” going on and unless something is really going to impact people, they tend to ignore it. It’s the same with SMEs, and it’s also true for their advisors.

Ask people if they’d prefer to lose weight, or have more money, they’d say yes. But that doesn’t mean they’re willing to do something about it.

Slonim says it’s the same with business funding. Of course, business owners would prefer not to have to use their personal property as security – but that doesn’t mean they automatically act on that preference. They don’t want to pay more than the rates they have traditionally paid to the banks, which are relatively low because the bank holds property as security. There’s a lack of understanding around the issue of pricing for risk.

ASBFEO’s Kate Carnell agrees that SMEs lack an understanding of pricing for risk. She says SMEs are not looking beyond what they know and, when seeking finance, instinctively reach for their own bank. The Ombudsman says banks will often secure a loan against personal property, irrespective of how the SME will use the capital. Business owners need to understand the business funding options available and which best meets their needs.


Awareness does not equal action

One in five SMEs (20.5%) are still unaware that they can borrow against business assets rather than just use their personal property. Almost three-quarters of business owners

(72.9%) are aware of asset-based lending (such as equipment finance or invoice finance), but still borrow against personal property – despite SMEs saying property is their least preferred security option.

Of these SMEs who are aware of asset-based lending, almost half (48.1%) currently use it. These businesses are borrowing against cars (44%), trucks (20.6%), receivables (15.7%), yellow goods (10.8%) and miscellaneous others such as manufacturing, EDP or IT equipment (1.7%).


SMEs prefer not to borrow against property

When providing security for a business loan the overwhelming preference by the small to medium business sector is to use non-personal assets (57.4%), or to seek funding against a car or truck (23.7%). The least popular preference, selected by only 5.5% of SMEs, is to borrow against property.

This is in light of 91.4% of SMEs indicating in the March 2019 SME Growth Index that they would “definitely or probably” be prepared to pay a higher rate to obtain finance that didn’t rely on real estate security.

East & Partners Head of Markets Analysis Martin Smith believes the research highlights a step change in SME lending behaviour that may leave incumbent bank providers behind if they are unable to adapt to the SME segment’s evolving growth funding needs.

The SME Growth Index found that a high proportion of SMEs would prefer not to provide security at all. Of the total SME sample, 28.2% prefer unsecured loans, 15% nominated unsecured business credit cards and 14.9% named unsecured overdraft facilities. More than one in five SMEs (22%) independently nominated that their preferred option is to borrow against receivables. Notably, they incorrectly refer to receivables funding as unsecured – in fact, the loan is secured against the business’ invoices.

A sizeable 14.3% of businesses are unsure or hold no view about what type of security they would like to provide for their business borrowing.

Among the SMEs actively planning to invest in their business in H2 2019 there remains an overreliance on existing equity in the business (83%) or new equity (12.8%) to fund growth.

This indicates a potential knowledge gap in business owners’ understanding of funding options available within the SME sector, something the joint ASBFEO-Scottish Pacific Business Funding Guide, a free resource for business owners and their advisors (accountants, bookkeepers, brokers and financial consultants), aims to address.

Mature SMEs avoid using personal assets

Mature businesses (those that have been operating for a decade or longer) are much more likely to be switched on about not using personal assets as security to fund their enterprises. They prefer to secure their business borrowings against non-personal assets at almost triple the rate of SMEs under 10 years old (83.9% versus 30.2%).

Businesses under 10 years old are three times more likely to be unsure or have no view on a preferred type of loan security. For those who prefer not to provide security, mature enterprises lean towards a term loan whereas the younger ones nominate a business credit card.

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

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