As we head into the final quarter of the year let’s talk about the finance situation for small businesses. Traditionally the busy Spring and Summer season is approaching but getting the funding to operate and grow remains a challenge.
Cash is king
The old saying “cash is king” should be changed to “cashflow is king” when talking about small business.
The lifeblood of a business is the cash it can generate. Of course, economic profit is important, you need to or should make more than you spend, but often it is a lack of understanding, managing and improving cashflow that kills businesses.
Even for big businesses, for example the very recent collapse of the global travel company Thomas Cook. This business was started 178 years ago, and this week went bankrupt. The specifics will leak out soon, but we can be certain cash flow and financial mismanagement was a central piece in the collapse of this house of cards.
If it is important for bis business it is even more important for small businesses to generate and have access to cash.
In a recent report from the accounting software company Xero they said it takes an average of 33 days to get paid for a 30-day invoice term. On top of that, big trade suppliers and the larger end of town that buys from the small end of town, said that more than half the time they pay late.
All of this puts incredible strain on a small business that needs cash today but isn’t getting it till the week after tomorrow or later.
For context, there are about 2.3 million small business in Australia who account for 35% of our countries GDP and 44% of private sector employment. These are the popular stats spruiked by politicians when talking about small business and them being the engine of the economy.
When most of these small businesses are getting paid late we have a whole lot of people struggling with cash flow.
To add further pressure, banks have been very difficult to deal with and overall the amount of credit given to SMEs appears to be declining.
So given these cash flow issues, where do they look for finance?
Shopping online
In somewhat an ironic twist of fate small businesses are increasingly shopping online for finance, similar to how their customers are shopping online as well.
According to a recent report from online lender Scottish Pacific the percentage of SMEs relying on their ‘main’ (i.e. big 4) bank for finance dropped from 38% to 18.7%.
That is a very telling figure.
Firstly, it tells us what we already know, in that most people are pretty tired of working with a big bank, not only for their home loans and personal banking but also for their business banking and funding as well.
This is partly out of necessity as the big banks have become really painful to deal with in the wake of the royal commission.
Secondly, there are really viable options for finance right now that didn’t exist a few years ago. This includes neo-banks but also SME business loan focused online fintech lenders.
Take Prospa for example, who recently listed on the ASX after a failed earlier attempt.
This is proof of the amazing work they and others in this newish marketplace are doing, and actually helping SMEs grow with providing funding the banks might have said no too.
In an update from November last year we talked about the new funding line the government has established to try and ease the cost of funding for these online based lenders, and hopefully soon we will start to see tangible results. NAB also committed $2 Billion in lending and just announced this week they have given an online lender of personal loans $57 million to play with.
But there is a cost for online convenience.
When the average consumer buys products online they tend to be cheaper than from a retail store, unfortunately for SMEs that is almost the opposite.
The cost, namely fees and the interest rate, from online lenders is generally much higher from online lenders compared to banks.
The reason that is the case though is because the bank wants / needs property as security, and if they have property as security the risk is lower and therefore so is the rate.
There are many ways for businesses to fund operations and growth without using the family home as security for a bank. Fortunately, Skyward Financial works across the spectrum with major banks, non-bank lenders and fintechs to help SMEs get the optimal funding they need.