If small business is the engine room of the economy, then cash flow must be the fuel that keeps it moving. Just as an engine without oil will inevitably stall, a small business without a steady, reliable stream of working capital will eventually grind to a halt.
The problem for many small and medium-sized enterprises (SMEs) is that economic forces, many of which sit outside their control, have seen this flow of cash reduce to a trickle.
More than one in five (22 per cent) of the SME owners surveyed in April by YouGov research on behalf of non-bank lender Prospa indicated their business had no cash reserves left, with a similar number (21 per cent) saying they would run out in one or two months.
Speaking at the time, Prospa’s co-founder and chief revenue officer Beau Bertoli said: “The current economic conditions are such that small businesses are getting further away from the three to six months’ cash reserves recommended to cover operating expenses.
“We’re seeing a particular strain on the retail and hospitality industries, which have been disproportionately impacted by a decrease in discretionary spending, supply chain cost increases and rising fuel and energy expense.”
This issue has been compounded by a swell of late payments to small businesses in recent months. In September, the office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) revealed an increase in the proportion of small businesses seeking help in resolving payment disputes because one operator failed to pay within the relevant terms.
Payment disputes accounted for 42 per cent of all assistance cases managed by the advocate in the financial year 2024, an increase on the proportion in FY23 (36 per cent) and FY22 (29 per cent).
At the time, ASBFEO Bruce Billson said disputes of this nature could be something of a canary in the coal mine, indicative of broader cash flow issues.
“Cash flow is the oxygen of enterprise, but difficult conditions mean when one party is late in paying, it can cascade through the supply chain,” Billson said.
“Many small businesses are drawing on their cash buffers to keep their business afloat. Recent surveys have found nearly one in four have no cash reserves, while 18 per cent have less than a month’s cash at hand to fulfil their obligations.
“The business owner will usually pay themselves last after paying their bills and staff, so slow payment can needlessly amplify the risks of business ownership.”
Input issues
So, what are the forces heaping this pressure on SMEs?
Jon Sutton, CEO of non-bank lender ScotPac, tells The Adviser that a high inflation environment and rising costs to key inputs such as fuel, insurance, and transport have dented many SMEs’ ability to generate cash flow.
“There is a lot of research out there saying that the time to pay invoices is getting longer and longer as people delay those payments. Inevitably that flows through to SMEs,” Sutton says.
“If you think of cash flow, it’s the lifeline of any SME company. It’s the blood that circulates through the company. The greater velocity of cash flow, the more successful businesses can become, because they can invest more.”
SMEs have also faced rising wages, an increase to the superannuation guarantee and ramped-up debt collection activity from the Australian Tax Office (ATO), which flagged “firmer and stronger” actions for businesses with outstanding obligations.
“It’s very difficult to be able to recover cost increases in their businesses through pricing power. These are all costs that are borne by small businesses,” Sutton says.
Valiant Finance broker Jacob Morris, named Finance Broker of the Year at The Adviser’s Australian Broking Awards, says many SMEs have already dipped into cash reserves.
“All these factors contribute to SMEs finding themselves relying on their cash reserves and savings they didn’t want to touch to simply maintain operations,” Morris says.
“The reality we’re seeing in the market right now is that businesses, even those that thought they had sufficient financial buffers, are suddenly back in survival mode. It’s a tough environment, requiring SMEs to rethink their cash flow strategies.”
Gear shift
As these economic pressures mount, many SMEs are turning to brokers to help them seek cash flow finance for relief.
“Having a fallback option (such as an overdraft or line of credit) can go a long way in helping SMEs maintain peace of mind,” Morris says.
“The goal here is simple: build a safety net and know it’s there if you need it. As a client of mine in the construction industry once said to me when discussing an overdraft for his business: ‘When the rain hits, it’s the one with the biggest umbrella that stays the driest.’”
Cash flow finance is also helping SME owners realise growth aspirations, despite the tricky economic outlook.
Almost six in 10 (59 per cent) SME owners in ScotPac’s Growth Index said they planned to invest in their business in the next six months.
More than half (52 per cent) said they’d fund this new investment with a non-bank lender rather than a bank (42 per cent). In fact, 90 per cent of the SME owners said they would now consider using a non-bank lender in today’s market, a dramatic increase on the number who indicated they would in 2018 (44 per cent) and 2014 (7 per cent).
Sutton says the rise in popularity for cash flow finance solutions from non-banks can be attributed to their ability to find a solution fast.
“The reason we’re so successful, and why we do well in this segment, is because we have flexibility. We have the product choice in bed. We have experts who understand what SMEs need,” Sutton says.
“That speed to market is also incredibly important. You can go to a bank and it might take four, five, six weeks. Whereas at ScotPac, if you need a small amount of money, we can do that digitally, make a decision within 30 minutes and have that money in your account within 24 hours.”
Optimistic outlook
Morris says there’s a real opportunity for brokers to help their SME clients navigate cash flow challenges and, in doing so, create rewarding and lasting relationships.
“I believe that the most important thing for brokers involved in cash flow finance is to have a deep understanding of the lenders that operate in this space,” Morris says.
“I know this sounds simple, however from my conversations with brokers, I’m often surprised to find a significant gap in the range of lenders that many brokers consider when structuring deals. Many brokers seem unaware of the incredible variety of products and offerings available, often leading their clients to more expensive options or ones that really don’t fit the profile of their clients. Lenders today are forever evolving and can provide innovative and tailored solutions.”
Sutton also encourages brokers to do everything they can to provide their SME clients with cash flow solutions, whether it’s funding for the equivalent of a regular tune-up or major service.
“The Australian economy is built on the back of SMEs,” Sutton says.
“We have some very large, extraordinarily large companies in the economy. But the real blood flow of the Australian economy is down to the small-business owners that are supporting industry across the various sectors of the economy.
“We really need the SME sector to be firing on all cylinders.”
