Construction business owners have more sleepless nights over cashflow than any other sector - SME Growth Index findings.

With more than half of Australian SMEs forecasting improved revenue, cash flow and property market issues must be overcome if they are to reach their growth potential.

The latest Scottish Pacific SME Growth Index has been released, with East & Partners providing a national snapshot of the thoughts of 1,252 businesses with $1-20 million revenues, across all states and major industries.

More businesses are in growth mode than at any time since March 2016. Scottish Pacific senior executive Wayne Smith said one in two (51 per cent) are forecasting positive revenue growth for the next six months.

"The average projected revenue increase of 4.5 per cent is the most positive sentiment since 2016 and reflects a promising rebound in underlying business confidence within the SME sector," Smith said.

However, there is a growing prosperity gap among SMEs - while more are forecasting positive growth, those performing poorly are in significantly worse shape than they were four years ago.

Construction sector results

While cash flow is the biggest cause of sleepless nights for all sectors, the problem is most prominent in the construction sector (named as the biggest issue by 86 per cent).

When asked how much additional revenue could have been generated with better cash flow, only five per cent of construction sector SMEs reported that cash flow could not have been better - this sits below the all sector average of eight per cent.

"Staff, supplier and customer issues, along with worries about disruption of their business model, were more of a problem for construction SMEs than any other sector," Smith said. 

"In contrast, construction was the SME sector least likely to say they have not enough hours in the day to complete what was needed in the business."

Fewer construction SMEs (10.7 per cent) are putting in 80 plus hour weeks than any other sector - but still, more than half this sector's leaders (50.4 per cent) are putting in 60-80 hour weeks.

This sector is more positive about revenue growth, and growth percentage, than the all sector average. 54.5 per cent of construction SMEs are predicting positive revenue growth over the next six months, at an average 4.8 per cent improvement.

"Construction businesses, given they struggle most with cash flow, need to look for funding methods that grow with the business, free up cash to pay wages and other obligations and don't require onerous paperwork," Smith said.

Funding options not tied to property, such as invoice finance, work well for many construction business owners."

Cash flow is an increasing problem for the whole SME sector, and business owners are really putting in the hard yards (on average, spending 66 hours a week working on or in their business).

"Many business owners are cash-strapped, time-poor and confused about the options available to them to fund their growth," Smith said.

"With a declining property market and banks exercising caution, the concern is that a lack of credit could hamper growth prospects.

"Business owners will need to consider funding alternatives to traditional property secured lending.

"Those SMEs who find alternative ways to fund growth and master cash flow management will have a clear advantage over their competitors."

Continuing the trend of SMEs looking beyond banks to fund growth, 96 per cent could name a key reason to borrow from an alternative lender, with fast credit approval and reduced compliance the main drawcards.

Almost one in 10 business owners (eight per cent) say revelations from the Banking Royal Commission will prompt them to seek out non-bank alternatives.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, said today that Scottish Pacific's latest SME Growth Index identifies the issues most raised with ASBFEO by SMEs across the country.

"Extended payment times impact business cash flow, which is critical to SME day-to-day operation," Carnell continued.

"Reduced cash flow impacts the ability to pay staff, superannuation and the quarterly BAS, and an overly complex workplace relations system inhibits employment, which in turn inhibits growth.

"The Index also points out SMEs are looking at alternatives to banks to access finance, including invoice finance, fintechs, government grants and crowdfunding.

"We've done considerable work in this space, recently releasing our Affordable Capital for SME Growth report and Borrowing from fintech lenders guide."

Cash flow is the top concern

  • 79 per cent of SMEs say cash flow issues cause the most sleepless nights, up from 73 per cent in 2016. The opportunity cost of poor cash flow is staggering. With an average 17 per cent revenue hit estimated by SMEs, East & Partners have extrapolated that poor cash flow costs the SME sector $234.6 billion in 2017.
  • SMEs are being squeezed at both ends, by customers increasingly paying late (a major issue for 31 per cent of respondents) and suppliers cutting payment terms (the key stress factor for 19 per cent).
  • The issue that most impacts on cash flow continues to be red tape and compliance (nominated by 73 per cent of SMEs and focused around BAS, the Fair Work Act and company tax concerns). 

SMEs open to non-bank funding

  • Alternative lenders are firmly on the radar of SMEs, attracted by fast credit approval times (the key benefit cited by one in four SMEs) and streamlined compliance requirements (cited by one in five).
  • Fewer than 10 per cent of SMEs say they'd prefer to fund their business growth using property as security, and one in five cited not having to borrow against property as the main benefit of non-bank lending. In light of national property market falls, SMEs whose credit is tied to property will face an increasing challenge in funding growth.
  • Despite an SME lending landscape dominated by the Big Four banks and their subsidiaries, only 4% of SMEs say they would never consider borrowing from an alternative lender. This is good news for the emerging fintech industry, and the long-established debtor finance sector, who are offering SMEs a broader range of funding options beyond the banks than ever before.
  • Growth SMEs recorded a two per cent drop in intention to fund growth by borrowing from their main relationship bank. This bank borrowing intention, now sitting at just under 23 per cent, has continued to fall since the Index began in 2014.

Business owners feeling the pressure

  • SME owners don't clock off. Despite technical and digital innovations, more than 40 per cent of business owners put in 60-80 hours a week on the job and one in five clock 80+ hours a week.
  • Two-thirds of SMEs said their major cause of sleepless nights is not having enough time in the day to get everything done. This was the second biggest SME issue, only cash flow caused more concerns.
  • A growing number of SMEs (25 per cent, up from 17 per cent in 2016) are worried about the potential for sudden disruption of their business model.

Growth prospects

  • More than a third of respondents (37 per cent) identify as growth businesses. It is these businesses who are really feeling the pinch from cash flow issues. 59 per cent of growth SMEs areseeking additional finance to fund projected growth, with one in three looking to borrow $50,000 to $250,000 and a similar proportion seeking $500,000 to $2 million.
  • About one-quarter of SMEs expect revenue to hold steady, and one-quarter expect revenue to decline, by an average of six per cent. For those with declining revenue, the range of predicted decline (5-13.5 per cent) is almost double that of 2014.

By far the most common way for SMEs to fund growth is to use their own funds (89 per cent), ahead of borrowing from their primary bank (23 per cent), using alternative lenders (15 per cent), taking on new equity (13 per cent) and borrowing from secondary banks (10 per cent).

"It's crucial to have reliable working capital, yet nine out of 10 SMEs reach into their own pockets to fund growth rather than use options that help them retain working capital within their business," Smith said.

"Why are so many SMEs using inflexible, debt such as personal credit cards instead of more sustainable funding solutions that would allow them to grow without such intense cash flow pressures?"  

Scottish Pacific (ASX:SCO) is Australasia's largest specialist working capital provider, who for 30 years have been lending to the owners of small, medium and large businesses, free from the constraints of traditional banking. Its customers are SMEs with revenues ranging from $500,000 to $1 billion.

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