In 2018, twice as many SMEs reported lower cash flow amounts at the end of the year compared to the beginning. When cash flow slows to a trickle, businesses struggle to grow and function properly. The Australian SME study, found that loan rejections caused 20% of Australian business owners to suffer from reduced cash flow. In turn, they had trouble financing their existing business debts. If you're worried about business debt financing, take a look at your options below.
1. Monetise Your R&D Grant Claim
Have a meeting with your accountant and talk about growing the expenditure residing in your balance sheet in regards to Research & Development. Perhaps you have options to monetise your R&D accrual by setting up quarterly advances on the amount due. It's important to tread carefully with this option because it could be risky if the Australian Government doesn't approve your full R&D claim.
2. Establish a Property Holding Company
Establishing a property holding company is an excellent opportunity to sit down and go over your business premise with your accountant. This is usually found on the balance sheet at historical cost and pledged to the bank for security purposes. It's a very under-utilised asset when it comes to financing business debt. Your accountant should be able to help you establish a new property holding company and transfer the property's ownership.
We have seen multiple clients establishing operating and property holding companies over the past five years with tremendous success. The bank can revalue the property and potentially find a loan-to-value ratio of 60% and implement it at some of the lowest rates Australia has seen in history.
You can then repay any terms loans with the additional proceeds you raised from establishing and gearing a new property holding business. Utilise the rest of the proceeds to deleverage your operating company. Many business owners extinguish their term loan debt in their operating companies, and this results in it being the sole entity that holds the trade lines and working capital. It has much lower leverage, and the company can be more competitive.
The Role of Big Banks and Financing Business Debt
Historically, the four big banks manage the entire cradle to grave relationship with their business banking clients by offering 100% of the short-term funding, tradelines, core term debt and asset finance. Post Royal Commission, the banks appear to be ‘on the nose’ and SMEs have lost confidence in their historical banking relationships. Post GFC, the big four banks continue to focus on home loan opportunities or on the corporate end of business, leaving the little guy out in the cold.
In Australia, the past five years have seen a raft of non-bank lenders start designing and providing specialist services that effectively disintermediated the 'old world' banking market. The historical "whole bank" relationship has begun to deteriorate, and many SME business owners have begun shifting 30 to 50% of their total banking services to non-bank lenders.
The advantage these non-bank lenders have is their speed to market, great user experiences and customised product solutions. Customers seem to appreciate what non-bank lenders do more than the 'old world' banks. Evidence shows the Big Four struggling to keep up with Trustpilot scores of 2.5 or less and negative 1 to negative 10 Net Promoter scores. Looking at the non-banking lenders, they have scores that exceed 4.8 and 70, respectively.
- Westpac Banking - Trustpilot: 2.4, Net Promoter: -7.3
- Commonwealth Bank of Australia - Trustpilot: 2.5 to Net Promoter: -1.2
- National Australian Bank - Trustpilot: 1.9, Net Promoter: -5.6
- Australia and New Zealand Banking Group - Trustpilot 1.4, Net Promoter: - 6.8
So, what options can the SME business owner consider? They can review their balance sheets and find opportunities to leverage and monetise.
3. Specialist Trade Lines
Non-bank lenders like Banjo or Octet can and do move quickly. They can establish short-term specialist trade lines to assist businesses with importing or exporting goods. Doing so funds the trade cycle in a user-friendly and efficient manner.
4. Working Capital Finance
The operating business has the option of using non-bank lenders like Banjo for short-term working capital requirements instead of the 'old world' big bank. They often provide finance up to $500,000 on terms ranging from 6 to 24 months within 72 hours. This quick funding allows companies to focus on generating a return on investment by moving quickly on any new opportunities. Non-bank lenders also typically double as cash flow lenders and will not register landed security over your business assets.
5. Approach a Non-bank Invoice or Debtor Financier
Once you issue invoices to your clients and they're outstanding, your cash flow is within your grasp. Focus on accelerating the cash conversion cycle by utilising invoice financiers. This allows the company to grow. With the reduced appetite of the big four banks and disintermediated banking services providing debtor finance, you have options. Non-bank lenders like Octet and Scottish Pacific provide invoice discounting quicker, cheaper and simpler.
If you need to finance business debt, you have options available. You can monetise your R&D grant claim through the government, establish a property holding company or short-term trade lines, use working capital finance or approach a non-bank debtor financier. All five options can improve your cash flow and help your business thrive. Talking with your accountant will help you decide which one is a more viable option for your company.