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Two-thirds of Australia's SME owners dip into personal finances to fund their businesses

Allsport Australia/Getty Images

For a sector that in aggregate is so important for the Australian economy, the latest results of the Scottish Pacific biannual SME Growth Index paints a disquieting picture about the health of the sector at an individual level.

The good news is that the index showed that 58% of SMEs (the survey included 1200 firms) “are in positive growth mode, with an average revenue growth forecast of 5.2%” but that’s down from 6.7% in March 2015. Only 17.5% are expecting negative growth.

The survey also showed that 70.6% of SMEs see their businesses as being “stable or in a growth phase” while 11.3% see themselves as startups and 18.1% are “consolidating or contracting”.

Worryingly though, Scottish Pacific said “what drives growth is often a mystery” to SMEs with 35.2% (up from 28.2% since the index began in September 2014), reporting they are “simply following their nose”.

Perhaps that’s why the index also found that:

SMEs resorting to personal finances (including credit cards with high interest charges) to support business growth is very high at 65.4%, with 17% regularly drawing on personal finances and 48.4% doing so occasionally.

Only 10% of SME owners had never settled business expenses using non-business sources.

No doubt it is also why banks often want bricks and mortar security to lend to SMEs.

And it’s access to credit (debt) that SMEs increasingly see as a barrier to growth and success with 62% of respondents, up from 57.3% a year ago, citing this as “a key barrier to success”.

That’s almost equal to “the perennial top bugbear of high or multiple taxes (62.7%). Concerns about red tape are also increasing (a key barrier for 56.5% of SME owners, up from 53.8% a year ago),” the report showed.

But SMEs don’t want to provide real estate security to obtain credit they want unsecured access to debt.

“SMEs show strong demand for more flexible lending terms as an alternative to standard term bank debt, including alternatives such as debtor finance, invoice discounting and factoring. In the past year, there has been a 20.6% increase in non-bank lending demand, from 13.6 to 16.4% of SMEs,” the report showed.

So, it’s no wonder that invoice trading is the new darling of Australia’s fintech loan market.

The report showed “more than two-thirds (67.9%) of SMEs are willing to pay a higher rate to obtain finance if it means they don’t have to provide real estate security”.

This index reinforces the message in last week’s release of the Westpac-Melbourne Institute SME index for March. That index showed that current conditions for the SME sector are sitting at 88.6, well below the neutral level of 100.

Peter Langham, Scottish Pacific CEO said, “how SMEs are funded has a significant bearing on operations, from how well they can manage cash flow to the pace at which they can expand. It’s crucial to get it right and not think too short term.”

That’s true.

But the banker in me agrees with Langham when he says “personal finance may appeal from a convenience, speed and accessibility perspective – the downside is that higher than necessary funding costs cut directly into margin, and personal financing can impact on lifestyle and leave owners open to family conflict which can destabilise the business”.

The problem is this survey reinforces just why banks generally want some real security before the lend to Australia’s SME sector. It also reinforces why the fintech sector is going to continue to grow in importance as a funding source for SMEs.

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