SMEs say no to property as security: survey

| April 9, 2019

Eight out of 10 business owners say they resent providing property as security to fund their SMEs, and overwhelmingly they would be willing to pay a higher interest rate to get property out of the funding equation, according to national research.

SME Growth Index research is conducted independently by banking analysts East & Partners, on behalf of national working capital funder Scottish Pacific. The owners, CEOs or senior financial staff of 1257 SMEs across all states and key industries, with annual revenues of $A1-20 million, were surveyed and interviewed from late November 2018 to late January 2019.

SMEs willing to pay more to avoid property security

Of the 91% of business owners who said they were willing to pay a higher rate for finance if they could avoid using property as security, almost two-thirds (65%) indicated they ‘definitely’ would be willing, and more than a quarter (26%) said ‘probably’, according to Scottish Pacific CEO Peter Langham.

“The number of SMEs who would ‘definitely’ be prepared to pay more to avoid providing real estate security has more than doubled in the past few years, rising from 29.5% to 65%,” Mr Langham said.

Only 2.5% of business owners would prefer to provide real estate security rather than pay a higher rate over the life of their business loan.

Almost half SMEs say property market is hurting their access to finance

This strong sentiment to remove property from the business funding equation comes in light of the sharp correction in residential property prices affecting capital cities, Sydney and Melbourne in particular.

Current property market conditions, highlighted by stalling building and loan approvals, are clearly having an impact on small and medium business owners.

Mr Langham said almost half the SMEs surveyed (44.5%) say property market conditions are already making it harder for them to access business funding, likely due to the softening of house prices in major markets.

A further 35% haven’t felt the impact but say they are expecting the housing price correction and broader property market conditions will have a significant impact on their borrowing capacity in the near future.

“When we last assessed the impact of the property market in September 2017, three out of four SMEs said property prices were having no direct impact on their businesses. In the March 2019 SME Growth Index research, only one in five SMEs said they had not seen a direct impact,” Mr Langham said.

He said property prices are having more impact on SMEs in Victoria and NSW (affecting 48% and 46% of SMEs respectively), with Queensland small businesses (39% affected) the most buffered.

Declining or no-change SMEs are currently being hit harder by property market movements, with 54% of non-growth SMEs already impacted (compared to 36% of growth SMEs).

“For these non-growth SMEs, finances are already stretched thin and now with the property market impact kicking in they are feeling ‘when it rains, it pours’. These are the businesses that currently need the most support to get through tough market conditions,” Mr Langham said.

Property security is in top 2 SME funding frustrations

The message around property-secured lending is loud and clear: eight out of 10 business owners say they resent providing property as a security against new loans or as part of loan serviceability assessments. This was the second biggest frustration, behind only loan conditions.

Alongside this finding, for the first time SMEs are about as likely to turn to an alternative lender as they are to ask their main bank to fund growth.

“The environment that has developed as a result of the Banking Royal Commission means banks are making more stringent credit checks. SMEs looking to fund growth will have to factor in potential roadblocks around finance availability and using property as security,” Mr Langham said.

“One of the key benefits small business owners find in many of the alternative lenders, including Scottish Pacific, is they don’t have to provide their family home as security. This unshackles the family home from business growth and frees it to be used in other ways to secure their personal financial futures.”

“However, with Productivity Commission data showing 35-50% of Australian SMEs rely on property security to fund their businesses*, we believe that too many business owners remain unaware they can use balance sheet assets as security instead of property – assets including equipment, and invoices issued.”

While property prices and market conditions (including the worst annual drop in home loan numbers since the GFC) are cyclical, Australia’s long-term downtrend in the rate of home ownership should be noted.

“A not-too-distant future where there may be more entrepreneurs renting than buying means that increasingly business owners will have to consider business borrowing secured against assets other than property,” Mr Langham said.

“More stringent lending conditions, along with a cooling property market, will impact on SME owners who need to use their home as security against business borrowing. For any SME owner who feels compelled to rely on providing property as security for their business loans, the credit squeeze may well be on.”

* The Productivity Commission reports that around a third of all small business lending by the major banks is secured by real estate. Outside of the majors, the share of small business lending secured by residential property is higher, with almost 47% of small business loans by value secured by residential property.