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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 the fourth out of the six key insights in our March 2018 report:

How SMEs choose to fund growth

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If Australia’s small to medium enterprises had a collective Facebook page, their relationship status with traditional banking would have to be: It’s complicated.

The H1 2018 Scottish Pacific SME Growth Index reveals the ongoing knotty state of the association between small business and their main financial partners.

While the cost of credit is low, small business owners seem frustrated at the process required to tap into those cheap sources of finance.

For SMEs with plans to invest in expansion over the next 6 months, 24% of them report they will fund that growth by borrowing from their main relationship bank – continuing a downward trend, and well short of the high of 38% who nominated this option to fund growth in the first round of the Index in September 2014.

21.7% of SMEs say they plan to use non-bank lenders to fund upcoming growth (with 90.8% planning to use their own funds).

Non-bank lending intentions have trended upwards since the first Index, closing the gap between bank and non-bank lending intentions. Despite these intentions, more than 91% of SMEs responded in H1 2018 that in the previous 12 months they had not accessed any non-bank lending options to provide working capital for their business.

So while SMEs seem unsatisfied with traditional banks, they are not yet fully accessing opportunities available to them in the non-banking sector.

SMEs are predominantly funding business growth from their own funds: nine out of 10 SMEs that plan to invest in their business in the next 6 months say they will use their own finances. This outcome continues a trend of self-financing reported since the first SME Growth Index in 2014.

There are questions as to whether self-funding is the most productive use of scarce cash.

A shift in SME thinking? Both the Productivity Commission and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) are advocating for SMEs to have better and more equitable access to business funding. The Productivity Commission’s draft report into the Australian financial system found the most uncompetitive markets included small business credit and stated that non-banks should have better access to this market.

The latest SME Growth Index highlights that around one in 10 SMEs used alternative lending options in 2017. Of those accessing working capital from outside their usual bank, the clear majority (77%) utilised debtor financing.

Almost half of SMEs (47.6%) said they would consider non-bank lending options and 43.5% neither used nor considered non-bank lending options in 2017.

This indicates there is a disparity between SME intentions to use alternative lending, and their actions – is it for reasons of lack of time, level of difficulty or competing priorities that SME owners place moving lenders into the too-hard basket?

Growth SMEs were five times more likely to use alternative lending options than declining growth SMEs, perhaps an indicator of business necessity moving owners from beyond intention into taking action.

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

Our next release will be available in September 2018 and will be available on our website.

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