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Despite government stimulus introduced to encourage bank borrowing among SMEs, business owners are turning away from traditional borrowing solutions at record highs, according to one survey.
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SMEs considering non-bank financing options at new high: Scotpac
29 April 2021
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10 minute read
ScotPac on Wednesday released the results of its latest SME Growth Index survey, which showed businesses are looking to alternative borrowing options like invoice financing to curb debt.
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ScotPac chief executive Jon Sutton said 28.3 per cent of SMEs are looking away from banks for borrowing options, despite bolstered government stimulus introduced to encourage an uptake in bank borrowing.
“Having tried new styles of funding that might allow more flexibility and support better cash flow, business owners might think twice about traditional funding in which they have to take on more debt and potentially have to use their personal property as security,” Mr Sutton said.
While 54 per cent of SMEs decided to stick with their existing credit arrangements, 46 per cent opted for alternative financing.
Of the 46 per cent of businesses that looked elsewhere, 31 per cent reported doing so to develop new products and diversify revenue, 24 per cent said they needed to buy new equipment, while 21 per cent felt the need to boost cash reserves.
Another 20 per cent said they did so to refinance existing loans, 15.5 per cent felt traditional banks couldn’t meet their needs, and 7 per cent couldn’t rely on home equity to fund business requirements.
Only 16.8 per cent of respondents said they intended to open a line of credit with their “main bank”, while just 12.3 per cent said they’d turn to other banks.
Instead, new research from East & Partners showed that small businesses consider traditional borrowing options a hindrance to growth, and are increasingly looking to options like invoice financing in a bid to unlock capital without having to take on debt.
Invoice financing, which allows businesses to leverage unpaid invoices to open a line of credit, has become increasingly appealing because it allows businesses to take more control over their cash flow, Mr Sutton said. It was a trend which saw marked growth throughout the pandemic.
“Cash is always king but no more so than during the pandemic,” he said. “One in four small businesses said they had cash flow issues after being rejected from a loan, and a similar number had cash flow issues because their credit lines were reduced in 2020.
“Small businesses are in need of funding methods that smooth out cash flow gaps and allow them to take on new opportunities.”
According to the survey’s results, businesses targeting growth led the trend, with 24 per cent of respondents who identified as growing enterprises looking to non-bank financing options to fuel growth, compared to 16 per cent content with taking on a bank loan.
Mr Sutton said the sentiment is reflected in a proportionately low uptake of bank loan initiatives seen through 2020 and 2021. Though those avoiding debt, he said, are likely just putting off the inevitable.
“This SME sentiment is understandable; however, the result will likely be that many businesses who need an injection of funds just kick the can further down the road, instead of sourcing more appropriate business funding solutions,” Mr Sutton said.
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