As the 2022 financial year comes to a close, what can small businesses do to effectively manage their cash flow moving forward?
Small businesses have not had it easy over the last two years. The pandemic changed everything overnight, with lockdown restrictions affecting how businesses could trade and how consumers behaved. Many chose to stay home, opt for digital services, and clamp down on their spending amid all of the uncertainty.
While the economy has rebounded, inflation has sent the costs of essential goods such as petrol soaring, compressing businesses’ bottom lines. At the same time, many SMEs have reported they are struggling with labour shortages and supply chain disruptions have been exacerbated as COVID, conflicts and sanctions come to head.
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Indeed, a recent study from Banjo Home Loans found 51 per cent of Australian SMEs are concerned about supply chains, while 55 per cent said inflation is the top barrier to growth.
Fold into the mix the disruption caused by a federal election, it’s clear that the stress and uncertainty for small and medium enterprises (SMEs) have been ongoing.
But as Prospa chief revenue officer Beau Bertoli says, regardless of the volatile environment, small businesses have seen strong growth and they are carefully managing cash flow and passing rising costs to customers.
“As a result, business lending has accelerated and it isn’t expected to slow down anytime soon,” he says.
“SMEs are accessing capital to increase stock orders to manage supply chain issues, cover rising costs before passing it on to their customers, or making investments for future growth. As business owners continue to navigate through the current environment and expand their customer base, we expect capital will be required.”
Another SME lender, OnDeck Australia, has already recorded a significant uptick in demand for cash-flow finance, with a 43 per cent jump in loan originations in 2022, compared to the same period last year. But chief executive Cameron Poolman says small businesses are embracing opportunities for growth, rather than managing unexpected expenses.
He also expects SMEs will invest more into IT and staff training – to take advantage of tax measures in the latest federal budget.
“The opportunity for brokers is to help deliver fast, efficient finance to those small businesses looking to go digital or upskill their teams with the help of OnDeck,” Mr Poolman says.
However, many SMEs are also bracing to deal with unexpected expenses in the current environment.
Moula head of sales Sam Sfeir comments “SMEs need broker support now more than ever”.
“Rising labour costs as well as many other input costs are putting pressure on cashflow in the short term,” he says.
“Demand for cashflow funding has increased as a result.”
Mr Sfeir also warns that SMEs will need to watch for the Australian Tax Office (ATO), as after two years of relaxing standards through the pandemic, it seems to be becoming “less lenient.”
“In cases of outstanding tax debt, the ATO are reducing the frequency of providing extensions on payment arrangements and businesses require funding to pay out balances,” he warns.
SMEs to lean on non-banks as rates rise
Recent research from Banjo Home Loans showed almost two-thirds (62 per cent) of SMEs were facing challenges in securing funding, despite 63 per cent intending to leverage finance to drive growth over the coming year.
The largest barrier was found to be the time required to obtain funding, with 23 per cent of respondents agreeing, compared to finding a suitable interest rate, for 20 per cent. Previous credit history was also noted as a significant factor, impacting 16 per cent of respondents, while the perception that loan requirements were too strict affected 18 per cent.
However, two-fifths (40 per cent) of respondents said they were opting to use bank loans as sources for finance, compared to 19 per cent choosing friends or family and 4 per cent using non-bank lenders.
Meanwhile research from OnDeck has shown that around one in four SMEs are rejected for finance by mainstream banks, while of those who do gain loan approval, 25 per cent experience delays in the lending process that negatively impact their business.
And, as Prospa's Mr Bertoli reflects, studies have also estimated that around $23.9 billion in small-business loans have been declined from traditional lenders.
“Business owners have turned to traditional lenders, only to be faced with a strict lending criterion and an extensive application process,” Mr Bertoli says.
“These scenarios are not ideal for a business that requires capital fast to take a hold of opportunities.”
Moneytech CEO Nick McGrath explains that the rising rate environment will also make it tougher for SMEs to access credit and they will be forced to seek out alternatives in non-bank space.
“A lot of small businesses are going to have a more difficult time borrowing money from large banks,” Mr McGrath says.
“I think what that’s going to do, is push a lot of borrowers who would predominantly go to their main bank for financing into strong alternatives in the non-bank space, to businesses like Moneytech and others, because we have a completely different set of underwriting requirements.”
The banks have flagged their intentions to sink their teeth into business lending, as fierce competition in the low-rate environment has squeezed margins in mortgages. Although their businesses have previously been dominated by home loans, there is a considerably higher margin on each loan written in commercial finance.
Mr McGrath has observed the banks becoming substantially more competitive, “really pushing down into the space that non-banks have serviced previously”.
“It’s definitely a more competitive landscape, with the banks in the business banking space, but I do see them having a lot tighter underwriting standards, and rising interest rates are going to make it more difficult for them to approve loans,” Mr McGrath says.
“So I do think that, despite it being very competitive at the moment, I think it’s going to be a great time for non-bank lenders to support SMEs moving forward.
“Banks will continue to do it. But I don’t see them being as aggressive in this environment as what they have been over the last four months.”
However, as the cash rate has begun to ascend, more SMEs are expected to want to access funds sooner. A recent study by YouGov found 71 per cent of business owners who require funds were planning to apply for capital sooner, to avoid higher pricing.
Businesses will be more resilient than consumers as the cash rate rises, Mr McGrath adds, but they will shop around.
“They’re going to turn to their finance broker to go and look at either restructuring their existing facilities or finding alternatives. So finance brokers have a huge part to play in this environment, particularly for businesses,” he says.
Similarly, Mr Bertoli says this environment “creates the perfect opportunity for brokers to expand into commercial lending, as demand continues with SMEs who have the possibility of passing on increasing operational costs.”
New movements in the market
For cash-flow finance, a recent trend helping accelerate access to finance is the ability for lenders to tap into clients’ accounting software. Companies are gaining access to customer data via platforms such as Xero or MYOB, instead of requiring an SME to dig through paperwork with their accountant, saving time and effort.
There has also been shift towards asset-based lending, or ABL finance – where lenders effectively aim to be a one-stop shop, offering each finance product a client needs, from equipment loans, to trade finance, property and insurance premium funding.
“What it means is that a broker only needs to deal with one lender to fulfil all of the client’s product needs, as opposed going to four or five, which is really where the Australian landscape has been outside of the banks forever,” Mr McGrath says.
“I do see a shift and I see some of our competitors doing the same, where they might have only done trade finance, all of a sudden they want to start doing equipment, and maybe something else. So, I do see a big shift in lenders diversifying their product offering.”
Mr McGrath also predicts there will be an accompanying shift in technology, with platforms expected to pivot to requiring one application form across multiple products and to scan and analyse the data collected, to generate suggestions for other products.
For brokers, new tech has already started coming online too, with OnDeck able to provide faster turnarounds through its new credit algorithm, KOALA score, that can facilitate broker turnarounds in as little as 30 minutes with its Lightning Loan product. It is marketed as allowing businesses to access up to $150,000 in as little as two hours.
