The one issue that’s driving businesses to apply for finance

Elizabeth Barry 20 August 2018 NEWS

small business owner

4 in 10 businesses need finance to maintain short-term cash flow or liquidity, according to ABS data.

New figures from the Australian Bureau of Statistics (ABS) have shed light on why small businesses are taking out finance, where they're turning for funds and whether they're being approved. The ABS found that over the course of 2016–17, 16% of businesses sought debt or equity finance and of these, 89% received finance.

The main reason for applying for finance was to maintain short-term cash flow or liquidity (41%), followed by seeking finance to replace equipment or machinery (30%). For debt finance, the majority of business owners applied with banks followed by finance companies.

It's not surprising that the need to maintain positive cash flow is driving businesses to apply for finance. Throughout 2017, a number of surveys found small business owners to be struggling with cash flow and pessimistic about their own financial wellbeing.

The Scottish Pacific SME Growth Index from March 2018 found that 1 in 5 small- to medium-sized businesses (SMBs) were unable to take on new work because of cash flow restrictions. Moreover, 9 in 10 SMBs reported that cash flow restrictions had prevented them from generating more revenue. According to the ABS numbers, 19% of businesses cited a lack of additional funds as the most commonly reported barrier to the development or introduction of new or "significantly" improved goods, services, processes or methods.

Cash flow problems stem from a number of factors, but two key trends emerged in 2017 that had a strong effect on the cash flow viability on businesses: long payment times and access to finance.

The first, long payment times for small businesses, essentially sees larger businesses delay invoice payments to small businesses which results in a cash flow benefits for the former and a cash flow crunch for the latter. There have been improvements in this space, with the Small Business Ombudsman Kate Carnell launching an inquiry in April 2017 and then a National Payment Register to improve transparency.

Access to finance was also prevalent throughout 2017. While the reasons for this are varied, it is due in part to the larger banks' focus on secured lending as it became more difficult to get into the property market. This has been coupled with the rise of fintech and more smaller business lenders offering alternative business finance options. The latest ABS data shows that of the 16% of businesses that applied for finance, 89% were approved. However, Carnell noted that the ABS figures do "not capture the SMEs that do not get as far as making an application".

The Ombudsman launched a report into Affordable Capital for SME Growth in July 2018 which included eight recommendations to improve access to finance for businesses. This included a private sector-established investment fund and a new Government Guarantee Scheme.

Small businesses contribute 57% of Australia's GDP and employ over 7 million Australians. If cash flow is driving these businesses to finance, it's important to ensure there are measures available for small businesses to improve their cash flow and also have adequate access to finance.

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