Recent research done by East & Partners, found that non-banks could become the largest financiers of small- to medium-sized enterprises (SMEs) by 2020. They interviewed the owners, CEOs or senior financial staff of 1 257 SMEs across a range of industries and in all Australian states, with annual revenues of $A1-20 million
Based on the research findings, they found that invoice finance was the second most popular alternative finance vehicle after trade and import finance. Almost all SMEs polled indicated they are looking for finance companies that are quicker to deal with and have less red tape.
East & Partners predicts that non-bank finance companies could have more of Australian SME business than mainstream banks by 2020.
Reasons behind this anticipated swing in financing to the alternative financial services companies: tighter credit conditions, the flexibility offered by alternative finance companies and the fact that they will no longer have to put up their property as security. The latter is a crucial consideration because increasingly, small business owners do not want to put personal assets on the line for the business.
Should this trend materialise, it will break the traditional dependency business owners have had on banks. It will open up a range of other funding options that may better suit their needs. Alternative finance gives them access to more customised funding solutions, greater choice and more flexible financing solutions.
The research confirms that the traditional reluctance of SMEs to move beyond tried and tested working capital management strategies is fading away. Their increased willingness to consider alternative lenders, including invoice finance companies is gaining pace. In the latest research, less than a third of business owners said they would not consider using non-bank lending compared with almost a half the year before.
Reasons SMEs are looking outside the banking sector for funding include the expected funding fallout from the Banking Royal Commission. Research by Apricity Finance found that 70 per cent of finance brokers agreed that cashflow is ‘definitely more’ of a problem than it was for small businesses 12 months ago, and 92 per cent of brokers believed that finance was ‘more difficult’ to get since the Royal Commission.
It is little wonder that SMEs are looking outside the banking sector for other sources of finance that are much better suited to their business needs. Access to invoice financing is administratively easier. It is specifically tailored to solve the problem at hand –freeing up the revenue they have already earned so that they don't run into cash flow problems.
Another primary benefit of invoice financing is that the company does not need to use its assets, including property, as backing for the funds extended to them by the lender. Instead, they use the invoices as security.
Business owners prefer not to borrow against their properties, with the majority of SMEs prepared to pay a higher interest rate rather than put their property up as security.
Invoice finance has seen steady growth internationally. In the UK, MarketInvoice research found that the most popular SME funding choices were invoice and asset-backed finance.
It is encouraging to see SMEs considering alternative forms of finance, including the non-bank financing of their accounts receivable books. Not only are these convenient and flexible ways to meet their cash flow, but they also allow the business to unlock its growth potential.
It is encouraging to see SMEs considering alternative forms of finance, including the non-bank financing of their accounts receivable books. Not only are these convenient and flexible ways to meet their cash flow, but they also allow the business to unlock its growth potential.
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