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Australian SMEs moving to ‘disruptive’ finance?
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AN ENDURINGLY tough business finance environment and tight business bank criteria are seeing Australian small business leaders cautiously embracing disruptive finance.
Those are the findings of a recent report by The Invoice Market, whose research found “early signs that small to medium businesses are turning to disruptive solutions to solve common financing and cashflow problems”.
The report found long payment terms and difficulty accessing bank loans were the main factors driving SMEs’ search for better forms of finance. Factors such as these had produced speculation about non-traditional organisations that have other relationships with small business, such as telcos and big technology companies, coming into the market with finance products.
Internet-led short-term loan models, such as that of Nimble, could soon make their way into the small business arena. Crowdfunding was already having a significant impact for early-stage companies. In the past two years, the Australian market had seen more growth in alternative funding than over the past decade, the report showed.
The Invoice Market managing director, Angus Sedgwick said those who had not yet explored new models were generally feeling the credit squeeze, with 40 percent accessing funds through traditional forms of debtor finance “and a worrying 32 percent” saying they would be forced to use their personal savings or equity in the family home.
The report, Cash Flow Issues Drive Aussie SMEs to Disruptive Solutions, has confirmed anecdotal evidence from chambers of commerce and business associations. The research took in information from the NSW Business Chamber of Commerce, the Australian Bureau of Statistics and the RBA Small Business Finance Roundtable. The survey was conducted by phone, randomly among small businesses around Australia – but is limited by its respondent sample size of just 111 businesses.
“The move to disruptive financing models is a clear vote against the onerous and inflexible terms banks and other types of financing levy on SMEs,” Mr Sedgwick said.
“The internet is creating efficient markets. This is an exciting time to be in business in Australia.”
Mr Sedgwick said business finance could often be expensive, inflexible and unsuitable
“Just over 40 percent of the businesses in our survey said they’d turn to traditional debtor finance, with its flexibility compared to bank finance being the key benefit,” Mr Sedgwick said.
“But there are another 60 percent who wouldn’t have access even to this type of factoring, due to requirements that their invoices be spread across a certain minimum number of clients or based on geographical limitations.
“These are good businesses, but their risk profile is just too high for the institutions. Agility and creativity is key to servicing these businesses.
“Online models which connect businesses with investors are just one of the ways the issue is being addressed,” he said.
“It’s the same story in loans. SMEs in the early growth phase don’t meet the traditional debt funding qualification criteria, a situation which is only going to get worse if and when capital requirements increase.
“Fifty-two per cent of businesses told us they’re worried about how changes to bank capital requirements might make it even harder to get funding. So they’re looking to alternative forms of loan to fund their business.
“This is where peer-to-peer and crowd-funded equity-raising are really going to shine.”
Mr Sedgwick said the pressure was coming down the line on traditional funding from dispruptive sources.
“Disruptive platforms know that conditions are right for business to turn to them in droves,” he said.
“The number of disruptive finance providers entering the market has doubled over the last two years. With only 11 percent of businesses already looking to disruptive solutions, there’s definitely room to grow.
“The next boom in Australia could be driven by SMEs access to cash,” Mr Sedgwick said.
Mr Sedgwick said The Invoice Market operated as an online auction platform “which creates an efficient marketplace for invoice factoring”.
He said the platform matches businesses requiring cash flow funding with institutional and high-net-worth ‘sophisticated’ investors willing to provide working capital and cash flow finance.
He said The Invoice Market launched in Australia in June 2014 and has funded more than $10 million in invoices up to September.
The report can be downloaded here.
KEY FINDINGS
Two out of three businesses said lack of financing was affecting their ability to grow;
52% are concerned that reforms to the banking sector are going to make it harder to get a loan;
70% said long invoice payment terms were negatively affecting their cashflow;
The number of tech-enabled disruptive financing instruments in Australia has doubled over the past two years;
11% of SMEs are turning to disruptive financing instruments.
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