Despite assurances from banks that they want to support the country’s crucial small business sector, there was more evidence last week that bank lending to SME’s is in steady decline. Could it be that more and more Australian businesses are simply choosing different options for their funding?
Analysis by The Australian Financial Review showed growth in bank loans of between $100,000 and $500,000 has been negative for the last three quarters, with growth in that loan segment down 0.5 per cent in the December quarter – the worst rate of annual growth for seven years.
According to the review, the factors driving this slowdown in SME loans are ”falling house prices – which make it harder for businesses to use their property as collateral – and more restrictive self-imposed lending restrictions by banks.”
However, could it also be the case that small and medium sized enterprises are getting wise to the funding options out there, and are taking advantage of nimbler and specialist finance that can be far more useful and cost-effective that old-fashioned business loans?
Options for SME Funding
Before the financial crisis ten years ago, the easy availability of business loans meant that most small and medium sized businesses simply didn’t look beyond their bank for their funding needs. In doing so, they were arguably missing out on some great deals.
For example, a business that wanted money to increase its exporting activities, and had good foreign clients in place, would always benefit from specialist export finance. Because export finance is flexible and designed to meet the next order, it allows a business to grow as fast as its potential sales, while not costing it money if those export sales dry up for a period.
On the other hand, a steadily growing SME wanting to meet bigger and bigger orders for its product could opt for supply chain finance. That could ensure it got all the supplies in for each order, while not having to pay for them until it had delivered to its own customers. Similar benefits apply to import finance, and flexible invoice discounting.
Nevertheless, for a long time the dominance of old fashioned business lending – where a business agrees to a set of terms and fees for a fixed amount of money over a certain period, and pays it back with interest month by month – was somewhat self-perpetuating: business owners were used to relying on loans, and their growth expectations were tempered accordingly and then held to parameters set by the available funding and the obligation to repay it on schedule.
SMEs Have Woken Up
Necessity is the mother of invention: since bank loan financing abruptly dried up as a consequence of the ‘credit crunch’ and global financial crisis, SMEs around the world have learned to find new forms of finance and they have not been disappointed.
Firms that started using invoice discounting, supply chain finance, and other flexible funding solutions that don’t require collateral and are tailored to the immediate needs of their enterprise are not necessarily looking to jump back into the business loans market just because the money is being offered again.
The Australian Financial Review’s point about falling house prices making it harder for businesses to use their property as collateral is an interesting one. House prices have not fallen dramatically: could it be that business owners prefer not to stake their property against a plan to grow, tied to a rigid repayment deadline and with potentially punitive consequences should they slip?
At TIM, we see a lot of happy customers who are enjoying the growth opportunities and cash flow safety that our funding solutions offer, without the need to put the family home on the line. We offer a range of flexible funding options, and we are happy to welcome more and more Australian businesses onto our platform.
Join us now, and get tomorrow’s cash flow today!
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