Australian SMEs turn to Fintech

| March 26, 2018

The latest poll of 1,700 Australian SMEs by the Scottish Pacific Group finds that small to medium business owners are almost as likely to seek an alternative lender as to use a bank to fund their growth in 2018. Three-quarters of SMEs who used alternative lending in 2017 chose debtor finance and growth SMEs are five times more likely than steady or declining SMEs to look for non-bank lending options.

Scottish Pacific CEO Peter Langham said the growth potential for the non-bank lending sector is significant, given that 48% of SMEs who didn’t use non-bank lending in 2017 are considering it for 2018.

Mr Langham said the latest results of the twice-yearly national snapshot of Australia’s small to medium business sector come at a time when the Financial Services Royal Commission is underway and there are moves by influencers including the Small Business and Family Enterprise Ombudsman to put the spotlight on ways to improve small business access to funds.

“The Index found that for SMEs with plans to invest in expansion over the next 6 months, 24% plan to fund growth by borrowing from their main relationship bank – continuing a downward trend, and well short of the high of 38% in the first round of the Index in September 2014,” Mr Langham said.

“More than one in five SMEs (22%) plan to use non-bank lenders to fund upcoming growth, with 91% relying on their own funds.

“The trend towards alternative lending is not just an Australian phenomenon. A 2018 OECD study found that SME over-reliance on banks is changing, with rapid growth in the alternative funding sector. Growth was especially high in the US, UK and China, with Australia likely to follow this trend,” he said.

The Index found that of the SMEs who used alternative working capital options in 2017, their funding choices were: debtor finance (used by 77%), merchant cash advances (23%), P2P lending (10%), crowd funding (9%) and other online lending (5%).

“For growth SMEs with $A1-20 million annual revenues, debtor finance is by far the most popular alternative lender choice. It is likely that the FinTech sector, which has captured the public and media’s attention, is gaining customers at the start-up or under $A1 million revenue mark,” Mr Langham said.

The Small Business Ombudsman Kate Carnell recently indicated that 80% of small business owners have loans secured against their homes, using their homes as ‘piggy banks’ to sustain cash flow and pay wages.

“Alternative lending options, including debtor finance and P2P lending, offer SMEs the chance to fund growth without using property as security. Business owners need to know they have a credible choice when they are looking for funding,” Mr Langham said.

More needed to be done to highlight that SMEs have choices, because while respondents indicated high intentions to use alternative funders in 2018, 43.5% reported that in 2017 they did not use or consider non-bank lending options to improve their access to finance.

“Despite the Productivity Commission and ASBFEO findings on the need for more small business credit options, it seems many SMEs are ‘rusted on’ to their bank, even if it stifles growth.

“While access to funding options could be improved, credible alternatives are already available. SME owners and advisers need to look beyond the banks for options that might better suit their needs,” he said.

Mr Langham said Index results show that growth SMEs were five times more likely to use non-bank lending options than declining growth SMEs, perhaps an indicator of business necessity moving owners from beyond intention into taking action.