SME revenue on the ‘up’ escalator

The latest Scottish Pacific SME Growth Index, which polls small to medium business leaders across Australia, shows more than half are forecasting positive revenue growth in 2018.

This twice-yearly national snapshot of Australia’s small to medium business sector shows SME owners are optimistic about revenue growth, had improved cash flow in 2017 and are increasingly looking at non-bank lending options to fund growth.

Scottish Pacific CEO Peter Langham said the March 2018 Index shows 50% of SMEs forecasting positive growth revenue – the most since March 2016, but well short of the high of 62% in September 2014. Their average estimated revenue increase is 4.3%.

Two-thirds of SMEs reported better or significantly better cash flow compared to 12 months ago.

At the other end of the scale, one in four SMEs forecast negative growth (on average dipping by 6.4%), the highest average since the Index began in 2014. One in 10 SMEs say their cash flow is worse now.

“Whether business owners are optimistic or pessimistic about revenue growth and cash flow, across the board they highlight the major impact of cash flow issues on their operations,” Mr Langham said.

“While two-thirds of SMEs report improved cash flow, it’s revealing that nine out of 10 of SMEs say they still had cash flow issues in 2017 and nine out of 10 say these issues impacted on revenue. On average, small businesses say that better cash flow would have increased their 2017 revenue by 5-10%,” he said.

Mr Langham said the most common issues were government red tape (nominated by 71%), suppliers reducing payment terms (38%) and customers paying late (37%).

One in five SMEs said they were unable to take on new work because of cash flow restrictions.

Twice a year, since September 2014, specialist research firm East & Partners has conducted independent polls of more than 1200 SMEs across all states and key industries on behalf of Scottish Pacific, Australia’s largest specialist working capital finance provider.

SMEs name their most popular alternative funding options

For SMEs with plans to invest in expansion over the next 6 months, 24% say they will fund 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.

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

Of the SMEs that 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 using alternative funding options, debtor finance is by far the most popular working capital choice,” Mr Langham said.

He 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.

“Yet 43.5% of SMEs reported that they were are not using or considering non-bank lending options to improve their access to finance. Despite the Productivity Commission and ASBFEO inquiry findings on the need for more small business credit options, it seems many SMEs are “rusted on” to their bank, to the potential detriment of their business,” he said.

“While access to small business funding options could be improved, the fact is that viable, credible business funding alternatives are already out there, and the onus is on not just the providers, governments and SME lobby groups to promote these options, but also on SME owners and their financial advisers to make the effort to look beyond the banks for options that might be better suited to their business needs.”

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.