Businesses in Australia are looking for new, more reliable ways to fund growth. Tightening borrowing conditions from major lenders, combined with a growing awareness of other financing options is increasingly leading businesses to turn away from their primary bank to look for the funding they need. While businesses of all sizes are taking advantage of the new options offered by tools like supply chain and invoice finance, the issue of conservative lending practices has particularly affected SMEs.
The pressure to find new sources of funding as raised the larger business community’s awareness of alternative financing options like invoice and supply chain finance. Specifically, these tools can help businesses to regulate cash flow, to eliminate the need for short term debt, and improve their ability to access traditional business loans for long term projects in the future.
Small businesses show the most significant change
According to data collected by East & Partners for Scottish Pacific, the number of business owners planning to fund growth efforts using their primary bank has halved from 38 per cent to 18.3 per cent since 2014. The Australian Banking Association showed a less extreme, but still drastic reduction in the number of small business finance applications of 30 per cent
Access to credit has become more limited for SMEs
Declining home values left many business owners—who were using their homes as collateral—unexpectedly out of pocket. Suddenly unfavourable debt to equity ratios forced banks to begin rejecting loan applications, effectively stymying business growth. In order to continue to pursue growth opportunities, these businesses needed to look for other financing options that wouldn’t affect their debt to equity ratios, such as equity investors or off-balance sheet financing. Rapid growth in the use of this kind of financing, specifically invoice financing, shows how business owners are turning to alternative options in place of traditional loans.
Alternative financing offers unique options to businesses
Invoice financing is a great way to consolidate working capital for short term growth investments, but it’s not necessarily well-suited to funding a major long-term growth strategy. Instead, it’s designed to help businesses manage cash flow, and to deal with temporary budget issues and cash flow interruptions. By using these tools, businesses can take better advantage of some growth opportunities, while also improving their ability to access traditional credit from their primary bank for long-term investments.
Fast access helps to regulate cash flow
Traditional loans, even in established relationships, can take a long time to process. This doesn’t work well for businesses who often discover a cash flow problem at the same moment that they need it to be resolved. Invoice finance allows businesses to trade in outstanding invoices for cash in a matter of hours, while supply chain finance can help business to cover supply costs without dipping into existing working capital.
Together, these tools effectively give businesses the ability to adjust precisely when payments are made, and when revenues will arrive, ensuring that revenues always arrive in time to cover necessary payments. This kind of basic cash flow management is essential to eliminate potentially expensive and otherwise unnecessary short term borrowing.
Off-balance sheet financing improves access to traditional credit
Besides providing funds very quickly, invoice and supply chain finance allow businesses to access funds without impacting their debt to equity ratio. This means that they don’t involve borrowing money, and taking on new liabilities. Instead, they leverage the business’ existing assets. For example, invoice finance is effectively a way to turn an existing asset—the invoice— into liquid working capital with the help of a financier. Supply chain finance, on the other hand, extends the same kind of financing to a supplier on the business’ behalf. From the business’ perspective, the payment that then needs to be made to the financier is the same payment that was owed to the supplier. It was simply deferred by up to 90 days.
Good cash flow management is essential to help any business perform up to its potential, but it also helps it to access other financing options going forward. By using cash flow management tools that avoid the use of debt, businesses can keep their balance sheets clean, and their cash flow under control. As a result, they can present a much more financially stable picture to banks and potential investors, improving their odds of developing healthy investor relationships, and accessing traditional business loans. This allows them to better manage their operations and pursue growth opportunities in the near term, while improving their growth potential in the long term.