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SMEs favour higher rates over securing loan against property

by Reporter6 minute read
Peter Langham

Small business owners “resent” securing business funding against property, with the payment of higher interest rates flagged as a preferred alternative, new research has found.  

According to the latest SME Growth Index , commissioned by working capital funder Scottish Pacific and conducted by banking analysts East & Partners, approximately 80 per cent of small business owners “resent” securing funding against property.

The research, which involved a survey of 1,257 SMEs across Australia with annual revenues of $1 million to $20 million, also reported that 91 per cent of respondents would be willing to pay higher interest rates to avoid securing finance against property, compared to just 2.5 per cent who would prefer using real estate as security.

Of those respondents willing to pay higher rates, almost two-thirds (65 per cent) indicated they “definitely” would be willing, and more than a quarter (26 per cent) said they would “probably be willing.


“The number of SMEs who would ‘definitely’ be prepared to pay more to avoid providing real estate security has more than doubled in the past few years, rising from 29.5 per cent to 65 per cent,” the CEO of Scottish Pacific, Peter Langham, observed.

SMEs challenged by housing market conditions

Moreover, the research found that in light of falling property prices, almost half of respondents (44.5 per cent) said housing market conditions are making it harder for them to access business funding.

An additional 35 per cent said they haven’t felt the impact but are expecting the housing price correction and broader property market conditions to have a significant impact on their borrowing capacity in the near future.

“When we last assessed the impact of the property market in September 2017, three out of four SMEs said property prices were having no direct impact on their businesses. In the March 2019 SME Growth Index research, only one in five SMEs said they had not seen a direct impact,” Mr Langham said.

Mr Langham added that property prices are having more of an impact on SMEs in Victoria and NSW, where price falls have been most pronounced.

According to the survey, 48 per cent of Victorian SMEs and 46 per cent of NSW SMEs have been affected by the fall in home values, with Queensland small businesses the least affected (39 per cent).  

Further, the research found that “non-growth SMEs have been hit harder by the weakening housing market (54 per cent) compared to 36 per cent of growth SMEs.

“For these non-growth SMEs, finances are already stretched thin, and now with the property market impact kicking in, they are feeling ‘when it rains, it pours’,” Mr Langham continued. “These are the businesses that currently need the most support to get through tough market conditions.”

Mr Langham noted that recent credit tightening measures imposed by lenders off the back of the banking royal commission have also served as an obstacle for SMEs and pointed to funding available to businesses.

“The environment that has developed as a result of the banking royal commission means banks are making more stringent credit checks. SMEs looking to fund growth will have to factor in potential roadblocks around finance availability and using property as security,” Mr Langham said.

“One of the key benefits small business owners find in many of the alternative lenders, including Scottish Pacific, is they don’t have to provide their family home as security. This unshackles the family home from business growth and frees it to be used in other ways to secure their personal financial futures.

“However, with Productivity Commission data showing 35-50 per cent of Australian SMEs rely on property security to fund their businesses, we believe that too many business owners remain unaware they can use balance sheet assets as security instead of property – assets including equipment and invoices issued.”

He concluded: “A not-too-distant future where there may be more entrepreneurs renting than buying means that, increasingly, business owners will have to consider business borrowing secured against assets other than property.

“More stringent lending conditions, along with a cooling property market, will impact on SME owners who need to use their home as security against business borrowing. For any SME owner who feels compelled to rely on providing property as security for their business loans, the credit squeeze may well be on.”

[Related: RC exacerbating SME funding woes]

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