Many Australian small and medium-sized enterprises (SMEs) are finding it frustrating to secure funding for their enterprises. And those who borrow from banks are even more unhappy, which could be why more SMEs are looking to use other lenders instead of their main bank.

According to the latest research by East & Partners for lender ScotPac, nine out of 10 SME owners expressed frustration about securing funds for their business last year. And loan conditions were their biggest source of annoyance (84%), followed by having to provide property security (80%) and lack of flexibility (74%).

Interestingly, business owners using banks were more disappointed than those who work with non-bank lenders. For example, more than 90% of SME bank borrowers said they were unhappy about loan conditions – far higher than 7% among those who use non-banks.

More bank borrowers also found their lenders too hard to deal with, at 72%, compared to 39% of non-bank borrowers. In fact, frustration around funders being difficult to work with saw the largest proportional increase in SME sentiment, jumping from 47% of small business owners 18 months ago to 56% now.

“There was also a significant increase during the 2020 pandemic year of SMEs showing frustration that their funders couldn’t meet all their needs (22%, up from 16%),” says ScotPac CEO Jon Sutton.

It’s also worth noting that more than a quarter of participating business owners said they don’t feel secure with their current lender.

Using non-banks to fund growth

It’s hardly surprising then that SMEs are now almost twice as likely to finance new investments using a non-bank lender rather than their main bank.

According to the bi-annual ScotPac report, SME owners’ intention to fund new growth using a non-bank has reached an all-time high of 27.4% as they try to diversify their sources of funding.

Conversely, main bank funding is now at its lowest at 17.4%. This is notably down from a high of 38.4% in 2014 when the survey was first conducted.

Fewer owners plan to invest

However, fewer SMEs are looking to invest this year. Only about 50% of business owners polled by East & Partners plan to fund their growth over the next six months. This is down from around 60% a year ago.

“The fact that fewer SMEs are looking to invest in their business should be a concern for the sector, especially when it would be best practice for larger turnover SMEs to be making funding decisions much further ahead than six months,” says the report.

Of those planning to invest in their business, nine out of 10 will do so using their own funds or equity – up from an average of 84% over the previous three rounds of the report.

SMEs’ next most popular choice for funding their new investment is to use a non-bank lender, followed by sourcing new equity.

An opportunity for brokers

SME owners’ greater satisfaction with non-bank lenders offers an opportunity for brokers, according to Sutton.

 “Given that businesses using non-bank funding have fewer concerns about loan conditions and find non-bank lenders more flexible and easier to deal with, this provides the perfect opportunity for brokers to start a conversation with their small business clients about types of funding that can help their business, that go well beyond traditional property-secured funding,” he says.

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