Subscribe now to our Digital Magazine
May 2024
menu
Cover story

Cash flow finance

The heart of small-business success.

With rising supply costs, shrinking consumer spending, and an increasingly aggressive tax collection mandate from the ATO, SMEs have been facing a tough time recently. But cash flow finance has been a godsend for many small businesses – supporting them through thick and thin
By Charlotte Humphrys
Hero banner

SSmall- to medium-sized enterprises (SMEs) have been facing a tough time recently. As well as having to battle increasing goods prices, rising rents, inflation, and lower cash register inflows as a result of consumers tightening their belts amid a cost-of-living crisis, things have been taking a toll.

Payment defaults have been on the rise – with credit reporting agency CreditorWatch revealing that its payment default index reached a record high in February 2024, at 120 bps – with the average value of invoices hitting at a record low in the same month.

Advertisement
Advertisement

The chief executive of CreditorWatch, Patrick Coghlan, says that the combination of record low invoice values and increased business-to-business defaults was “concerning” as it indicated a depletion of cash reserves and a squeeze on margins.

In fact, over the financial year 2023, SMEs dominated external administrators’ reports, with the Australian Securities & Investments Commission (ASIC) finding that the most common cause of administration was due to “inadequate cash flow or high cash use”, with more than half (52 per cent) flagging that as the reason.

This has been exacerbated by the fact that many SMEs are experiencing long delays in receiving money from invoices (which has led the Albanese government to overhaul the Payment Times Reporting Act 2020 and introduce reforms that will increase pressure on big businesses to pay small businesses on time and warn they will name and shame big businesses that fail to pay on time).

The Australian Taxation Office’s (ATO) plan to recollect debt following the hiatus put in place during the COVID-19 pandemic (around $39 billion of the $50 billion debt outstanding is yet to be recouped from SMEs) has placed added strain on SMEs to manage their cash flow.

But while the environment may seem gloomy, help is at hand, if you know where to look. Many SMEs have turned to brokers for support with paying off their ATO debt and to secure payout finance with non-bank lenders.

As such, cash flow finance has come to the forefront to support SMEs through dips in their income stream and provide businesses with flexible access to cash. The benefits of cash flow loans make them an attractive product for SMEs with larger fluctuations in revenue.

According to SME lender Banjo Loans, there has been a notable uptick in demand for cash flow loans. The Banjo Barometer report for 3Q24 revealed that there had been a 28 per cent increase in loan applications from SMEs when compared to the same period last year.

" The benefits of cash flow loans make them an attractive product for SMEs with larger fluctuations in revenue

The report found the surge in new loans was led by applications from businesses in construction services (59 per cent); healthcare and social assistance (20 per cent); manufacturing (17 per cent); and transport, postal, and warehousing (170 per cent).

Meanwhile, the value of new loans increased by 37 per cent year on year.

Furthermore, the report showed that loans increased over the year for businesses in agriculture, forestry, and fishing; mining; arts and recreation; education and training; information, media, and telecoms; utilities services; professional scientific and technical services; and rental hiring and real estate.

But, as the ATO continues its charge on recouping outstanding debt, business tax debts continue to be a key reason for loans being declined, particularly at the banks.

cover 1

As such, an increasing number of SMEs are turning to brokers for help. Speaking with The Adviser, James Kelder, finance broker at Green Finance Group, says that he had been recommending non-banks to SMEs as they “differentiate their offering with more flexible terms around timing of repayments and gearing”, despite the higher interest rates associated with them.

Non-banks have also been quick to move with the times and provide more solutions where they can. For example, ScotPac increased its Boost Business Loan offering to $500,000 last year and Bizcap and TP24 both now offer loans up to $5 million. Others have looked to offer more overdraft facilities and innovate the invoice finance space.

Indeed, according to the SME Compass Report 2023, which surveyed more than 1,000 SMEs, 12 per cent of SMEs used alternative commercial lenders last year, an increase from 9 per cent in 2022.

12%
of SMEs used alternative commercial lenders last year, an increase from 9 per cent in 2022

Simultaneously, the usage of bank loans decreased in 2023, according to the report, from 36 per cent in 2022 to 32 per cent in 2023.

But cost is increasingly becoming an issue. SMEs have highlighted that their foremost priority for using a broker is to help them find the lowest interest rate, which may see more SMEs look to take on secured finance this year.

Kelder notes that there has been a general increase in tension surrounding business cash flow among SMEs at present as “creditors are offering shorter terms [while] debtors are looking for longer terms”.

The finance broker noted that the construction and hospitality industries had been struggling recently with cash flow, which may come as no surprise given that 70.4 per cent of businesses with an outstanding ATO debt come from the construction services sector (according to the CreditorWatch Business Risk Index for March 2024). This is predominantly made up of smaller subcontractor businesses.

Jenaya Huxter, a broker at Ausloans Finance in Strathalbyn, South Australia, echoes similar sentiments, stating that an increasing number of SMEs were struggling to keep up with their business commitments.

Huxter comments: “Banking conduct is much worse, people are struggling more and more to keep up with current commitments, falling behind, and using other means like quick cash loans, multi-drawdowns on multiple cash flow lenders, or for consumer wage tap facilities.”

How are brokers supporting SMEs with cash flow finance?

Brokers have continued to support SMEs amid a complex economic environment by turning to non-bank lenders and taking a holistic approach to fully understand the clients’ needs.

Huxter reveals that she had turned to non-bank lenders to support SMEs due to their broad range of offerings for clients looking for asset finance, cash flow, and overdraft facilities.

She also notes that she had turned to lenders that provided fast access to loans without upfront credit checks as they are a “good example of being able to extend products and options out a wider audience”, however, it would not be her first choice.

“There are also some standout personal finance lenders who can [give] great options of supporting business owners for specific purposes using business income,” she says.

“There [is] a wide range of options available depending on the client’s specific needs, profile and ideal loan purpose.”

Kelder highlights that it was imperative that brokers look to find a balance between and SME clients’ needs now and into the future when working on funding packages to help “pre-empt cash flow requirements and minimise pain points”.

FEEDBACK
Got something to say about the digital magazine?
Email us at [email protected]