Top of mind for SMEs in 2021: paying down debt and finding new ways to fund business

Small businesses have signalled they’ll be looking for different ways to fund their businesses in 2021. This, and other insights that should be on the radar of credit managers, from the latest ScotPac SME Growth Index.

By Jon Sutton*

Small businesses have named paying down debt as their top priority for 2021 and have flagged building on their 2020 efforts to find new ways to fund their businesses.

These are two key findings in the latest ScotPac SME Growth Index. It has been a very challenging year for the small business sector: efforts to prevent the spread of COVID19 created hard internal borders, temporarily devastated certain industries and led to a government stimulus package of unprecedented size and scope.

Conditions were so challenging that at the time of the research (September and October 2020) one in three small businesses indicated they may sell or close if conditions don’t significantly improve.

Since 2014, ScotPac has engaged East & Partners to undertake SME Growth Index research twice a year, interviewing more than 1200 small businesses in the $1-20m turnover range (a representative sample of metropolitan and regional businesses across all mainland states and major industries).

Given many of the federal stimulus measures which helped prop up the national economy were designed around businesses taking on more debt, it’s worth looking at the SME debt landscape.

The November 2020 Index records rising angst amongst small ➤

“Given many of the federal stimulus measures which helped prop up the national economy were designed around businesses taking on more debt, it’s worth looking at the SME debt landscape.”

“We’d urge businesses not to wait until 2021 to make sure they have the right funding in place. The businesses who will be best placed to take advantage of the recovery are those that are planning now.”

Closing,selling,lookingbeyond Job Keeper – impact on SMEs

SMEs looking to close or sell 1/3

SMEs plan to sell or close their business if no significant improvement

CLOSING DOWN

Smaller SMEs hit hardest

SMEs in $1-5m turnover range are almost double as likely to look to close or sell within 6 months than those in $5-20m range

TO LET CLOSED DANGER AHEAD

SMEs looking for new funding options 2/3

planning to adjust business funding method to deal with pandemic aftermath

Source:scotpac.com.au

business owners about debt levels. SMEs told us the factors they were most positive about for 2021 were getting “back in the black” and its corresponding factor of reducing debt levels. The top challenges SMEs said they must overcome in 2021 were servicing excessive debt levels and diversifying their funding base/finding new sources of funding, along with avoiding insolvency.

Historic Index data shows a very large proportion of small businesses use easy access debt (such as personal credit cards or their own funds) to access working capital for their enterprises.

Credit managers would be aware the post-pandemic period offers an opportunity for SMEs to make tough decisions within their business. This includes finding better funding options, to unlock capital and ease the cashflow issues that can be crippling even in good times let alone during a recession.

We’d urge businesses not to wait until 2021 to make sure they have the right funding in place. The businesses who will be best placed to take advantage of the recovery are those that are planning now. The clear message is: don’t get caught short as the protection of government stimulus tapers off, take the time now to make sure you have the right finance in place.

Impact of the pandemic

Only half (54%) of all the small businesses polled say they are not looking to sell or close due to the impact of the pandemic, with a further one in three SMEs considering those options if conditions don’t significantly improve.

This serves as a point-in-time indicator, given the research was undertaken when Victoria was still in lockdown. However it provides a stark indication of the precarious situation for the small business sector if there was another major state lockdown or significant border closures.

East & Partners extrapolates from the data that the one in three SMEs looking to sell or close their business without significant improvement equates to approximately 88,000 businesses around Australia in the $1-20m annual revenue bracket, with about 50,000 of these businesses looking to sell and more than 37,000 looking to close.

The smaller the business, the more severe the impact of the pandemic on their long-term strategic objectives and solvency. Two out of every five smaller sized SMEs ($1-5m turnover) are looking to sell or close by April 2021 unless conditions markedly improve.

This is also the situation for almost one in four larger SMEs ($5-20m turnover).

Retail has been hardest hit, with only 9% of retailers definitely not making plans to close or sell. For manufacturing SMEs, without significant improvement 17% would be looking to close; for transport 3%. Nine out of 10 mining SMEs indicated they would continue in their business even if conditions did not significantly improve.

For Queensland SMEs, 8% were

“The critical message for small businesses, their advisors and for others with influence on the sector is: get ready.”

Forecasting growth: Optimism varies by industry

Transport sector staying positive

60%

expecting growth

Mining the most resilient

88%

forecast positive growth

Retailers expect revenue decline

39%

expect revenue decline compared to 33.5% expecting growth

Manufacture and Wholesale SMEs are optimistic

37%

expecting growth

Source:Scotpac.com.au

saying they could close; in WA 6% were eying closure. Victoria was the only state where more than half of its SMEs (54%) were looking to sell or close – 29.5% listed closing, with 24% looking to sell, making Victoria also the only state with a higher sell than close percentage. NSW small businesses are much more confident – only 9% flagged closing.

SME borrowing sentiment

More than half the SME sector (56%) experienced no significant change in borrowing demand during the COVID crisis. This figure was split evenly between those who said they relied on government stimulus and those who didn’t require the stimulus.

One in five SMEs reported their funding needs increased in the short-term, with a further one in 16 preparing for an indefinite increase in credit demand.

Only one in 10 SMEs had decreased borrowing demand as a direct result of the pandemic.

In the midst of the COVID crisis business owners were looking for new answers to perennial funding problems, with one in 12 adding non-bank funding facilities to deal with the impact of supply chain and revenue issues created by the shutdown.

We asked SMEs what funding adjustments they’d make in response to stimulus measures ending by April 2021, and their responses point to a significant shakeup within Australia’s small business funding sector.

Nearly two thirds are planning to reassess the way they fund their business, with almost a quarter saying they will reassess their actual funding provider. This was more marked in the $5-20m SME category (32% looking to reassess provider) compared to the smaller $1-5m revenue SMEs (15%).

Many are more open than ever about using multiple funders, increasingly non-bank lenders. One in eight SMEs say they plan to add non-bank funding facilities to cope with their cash flow needs once all the projected Federal Government stimulus initiatives end.

Other funding adjustments include decreasing their borrowings for 2021 (24% plan to pull back, ahead of 18% looking to increase their business borrowing).

SMEs with a clear strategy and appropriate funding will put themselves in the strongest position to face 2021 – so it is not ideal that 40% of smaller businesses (under $5m annual turnover) have no set idea how to fund their business in the short term.

The critical message for small businesses, their advisors and for others with influence on the sector is: get ready. Plan ahead to give yourselves the best chance of success and to ensure that your business is not at the whim of the markets.

With JobKeeper ending in late March 2021, and enforcement of ATO debt on the horizon, SMEs must have funding in place to unlock working capital and ensure continuity of business (download ASBFEO and ➤

ScotPac’s Business Funding Guide for a detailed overview of the main small business funding options).

Small business funding trends

SME Growth Index results show SMEs are actively diversifying their funding base to navigate the aftermath of COVID-19.

Small businesses are now almost twice as likely to fund their new investment using a non-bank rather than their main bank. Intention to fund new growth using a non-bank reached an all-time high of 27%, and main bank funding of new SME investment is now at its lowest (17%), down from 23% in H2 2018 and from the high of 38% in the first round of the Index in 2014.

Just over half the SMEs polled are looking to fund growth over the next six months (650 out of the 1252 businesses). The popularity of nonbank funding amongst these growth businesses has doubled since 2018 (then, 12% planned to fund growth using non-banks, now this figure is 23%).

Top funding frustrations

More than nine in 10 SMEs reported funding frustrations, with perennial SME funding pain points remaining a bigger concern than COVIDspecific frustrations. The top three frustrations were loan conditions (84%), having to provide property security (80%) and lack of flexibility (74%).

In 2021 the uncertainty surrounding housing prices could mean many businesses owners will no longer be able to use their family home to fund their business. It is important that business owners are aware of funding options that can provide them with the working capital they need by using the assets already in their business (for example, their outstanding invoices) so they don’t need to rely on the family home.

Of the COVID-specific response options, two thirds of SMEs were frustrated by the lack of a clear recovery path out of the pandemicinduced recession. Almost half encountered difficulty accessing government guaranteed loans during COVID-19. Nearly a quarter were frustrated that online lenders were charging high rates.

The SME frustrations that recorded the biggest proportional increase this year was that funders were hard to deal with and not meeting all the needs of their borrowers.

SMEs with non-bank borrowing rather than bank finance reported far fewer frustrations than their bank borrowing peers about loan conditions, flexibility and funders being hard to deal with.

Good results for SMEs who turned to advisors

With the Australian economy battling out of recession, as Victoria reopens and SMEs plan ahead for life beyond JobKeeper and other government stimulus offerings, the message to small business owners and those who work with them is: don’t panic, look for what you can do to improve your business.

Advisors play a key role in

Most states expect positive growth in next 6 months

Source: scotpac.com.au

“SMEs with nonbank borrowing rather than bank finance reported far fewer frustrations than their bank borrowing peers about loan conditions, flexibility and funders being hard to deal with.”

53%

of SMEs relied more on their key advisor during the pandemic 82% said this had a positive impact on their business

SMEs reliance on trusted advisors grows in 2020

63% of SMEs leaned on their key advisor for cutting costs

RESERVE BANK RESERVE BANK

37% of SMEs sought advice on accessing government stimulus

Source: scotpac.com.au

“Advisors play a key role in improving SMEs – just over half the businesses polled relied more on their key advisor, for example their accountant or broker, since the pandemic began.”

improving SMEs – just over half the businesses polled relied more on their key advisor, for example their accountant or broker, since the pandemic began.

They approached their advisors three times more frequently than average, and of those SMEs who sought advice from trusted advisors, eight in 10 reported that this external business advice had a positive impact.

The top five positive impacts small businesses said their advisors had were: — Reducing costs (63%), to help improve their bottom line — Helping SMEs access government support and stimulus measures (37%) — Providing confidence about the direction the business was taking (28%) — Improving customer relationships (19%) — Helping them access funding (18%)

Rebounding in 2021

Despite the massive impact of the pandemic, SME revenue growth forecasts through to April 2021 did not dramatically decrease, although this round of research did record a lowest ever all-respondent positive growth average of +0.1%.

Australia is dealing with its first recession in 30 years, and against this backdrop a record low 47% of small businesses are expecting revenue growth, and around a quarter are forecasting a revenue drop through to April 2021.

In a positive, despite a significantly challenging six months for the small business sector the number of SMEs forecasting a revenue decline moved only one percentage point, to 23.8%, since March 2020.

When asked to name the top three factors needed for them to rebound from the recession, Australian small business owners named open borders as the top response, by a significant margin. The other key items on the small business wish list were legislated 30-day payment terms and insolvency reform.

*Jon Sutton Chief Executive Officer E: suttonj@scotpac.com.au T: 1300 209 417

ScotPac is Australia and New Zealand’s largest non-bank SME lender, and for more than 30 years has helped thousands of business owners with the working capital they need to succeed. ScotPac prepared this article from excerpts of their twice a year SME Growth Index research. To download the latest Index or request previous Index research please visit www.scottishpacific.com/news/research. For more information contact: Kathryn Britt, Director, Cicero Communications kathryn@cicero.net.au 0414 661 616