It’s Time For Small Businesses To Explore Alternative Funding Like Crowdsourcing and Debtor Finance

The World Bank revealed in 2010 that Australia is the second easiest country in which to start a business. Second only to New Zealand at that time, it was shown that it was possible to start a business in Australia within two days. Furthermore, Doing Business, an annual report from the World Bank showed that Australia is fourth in regards to easily accessing finance. It has also been shown that the costs associated with starting a business in Australia are fairly low. This inevitably has a positive impact on the productivity and growth of a country. However, the situation for Small and Medium Enterprises (SMEs) in Australia is not as positive as the World Bank infers, which likely explains why it has since slipped to 14th place.

The real situation

The fact of the matter is a large majority of Australian SMEs struggle with cash flow and financial stability once they enter into business as a result of slow paying customers. A 2017 survey by CPA Australia, a professional accounting body, showed that approximately 32% of businesses find accessing financial support either “difficult” or “very difficult.” This means that many are searching for financial strategies that will allow business owners to secure cash flow. In Australia, financial strategies can be provided by an invoice discounting brokers or companies.  

Large businesses are in no better shape

Even viable industries like mining are not spared. The former Premier of Queensland, Campbell Newman, announced that a new committee had been established to organize the use of $10 billion worth of resources for uranium mining. The Uranium Implementation Committee will help Queensland take advantage of the resources, and Newman hoped that it would result in thousands of jobs throughout Queensland.

The announcement shows that Queensland’s uranium industry is set to advance and improve, which will greatly benefit businesses involved. However, for the majority of businesses, this will not enhance their situation. SMEs that do not benefit from the boom of the uranium mining do have options to improve their situation. Business owners struggling with cash flow or looking to secure financial viability are able to explore other financial strategies, such as crowdsourcing and invoice financing.

Traditional funding sources are losing steam

Historically, bank loans have often provided small businesses with crucial financial support. However, it is well known that access to loans has recently become restricted. With fewer loans available and stricter criteria, it has become increasingly challenging for small business owners to secure bank loans and commercial credit. The situation is only bound to get worse with recent announcements from the major banks of their intent to raise business borrowing rates.

Australia and New Zealand Banking Group (ANZ), Westpac, Commonwealth, and National Australia Bank (NAB) have all either raised their borrowing rates for businesses that are undergoing reviews of their current rates. Recent announcements indicate that NAB has promised to keep its rates lower than the other major banks but will not completely rule out raising its rates. This means that even once a bank loan is secured, the financial support it provides will not be matched to bank loans previously accessible as increased rates will mean businesses may still struggle with cash flow.

ANZ, on the other hand, has committed to support and maintain programs in Adelaide, Sydney, and Melbourne that are designed to foster and develop new businesses. ANZ’s general manager for small businesses says that the bank believes that backing start-up businesses will be mutually beneficial. The incubator program is currently being focused in Adelaide and is a three-month arrangement called Innovyz. The purpose is to not only support small businesses but develop business partners for ANZ, as well.

The program requires small businesses to provide proper documentation and cash flow predictions. The Council of Small Businesses of Australia says that by focusing on new companies, ANZ is neglecting many existing SMEs that are currently facing major challenges. He also believes the requirement for documentation is unnecessary. The flaws pointed demonstrate that while this could be promising news for many small businesses, many other SME owners must continue their search for financial support in non-traditional sources like crowdfunding.

Why exploring alternative funding is the new normal

For small businesses, access to bank loans remains challenging. This is why debtor finance is becoming more popular in Australia. Debtor finance falls in the family of commercial credit products but is not widely used in Australia as compared to other economies like the US and UK. However, the increasingly challenging financial circumstances of many businesses may drive small business owners to consider debtor finance. It is a financial strategy that allows SMEs to leverage the value of their clients by selling invoices at a discounted rate. In return, they receive immediate cash and thus, increased cash flow. Furthermore, they no longer have to chase debtors and clients who refuse to—or are unable to—pay for products and services on time.

Indeed, debtor finance and crowdfunding are fast solutions to financial instability and allow small business owners to ensure the survival of their enterprises. Furthermore, these are financial strategies that avoid committing to long-term contracts, providing business owners with control and financial freedom.