Opinion: Understanding the SME mindset

by 23 May 2018

In 2017, the number of business owners turning to their primary bank for a loan declined 14%. Scottish Pacific CEO, Peter Langham, explains why brokers are uniquely positioned to capitalise

The latest SM Growth Index by Scottish Pacific paints a clear picture of SME owners, their pain points, and their funding needs and intentions. For brokers, these results can help them understand the SME mindset and why it is important to offer a range of suitable funding options, which allow both clients and their brokers to grow.

Just over half the businesses polled expect revenue to grow in 2018, and two thirds reported improved cash flow for 2017. Those that are growing are growing strongly; however, growth businesses are more likely to be frustrated about cash flow.

Supporting the positive outlook, SMEs are open to different ways of funding their growth. Increasingly, they are looking away from the banks to more flexible alternative funding options. 

More than one in five SMEs – a total of 22% – opted for non-bank alternatives to funding their growth. A further 24% looked to borrow from their main relationship bank, and this bank lending percentage has trended down from 38% in our initial 2014 Index. 

The most popular funding choices for SMEs using alternative working capital options in 2017 were debtor finance, which was used by 77%; merchant cash advances, used by 23%; P2P lending, with a total share of 10%; and crowdfunding, utilised by 9%.

Combined, what these results demonstrate is that business owners are looking for flexible options, preferably not tied to real estate.

Extracting such information can take time, but when it comes to bottom-line questions, there is only one thing a broker needs to ask

In the case of debtor finance, not having to provide real estate security to fund business growth offers a level of security. Rather than taking on additional debt, the business receives an advance on money already owed to them from outstanding invoices. This way, they gain better control of their cash flow and boost their working capital levels with a facility that grows in line with business revenue, and that usually comes with fewer covenants.

It's worth looking at the main pain points identified by the SME Growth Index, and how brokers can help to ease these issues.

Putting aside high taxes – which, with unsurprising regularity, always top the poll – the Index shows that the three big concerns for growth SMEs are cash flow, conditions of credit, and availability of credit.

An overwhelming 90% of the 1,253 SMEs polled said cash flow issues negatively impacted on revenue in 2017. This was despite two thirds reporting that cash flow had improved compared to 12 months previously.

On average, small businesses say that better cash flow would have increased their 2017 revenue by 5–10%, with growth businesses indicating an even greater positive impact on revenue.

The broker's role

Brokers can introduce a range of funding options and can play an important role in identifying clients and highlighting the choice of funding options available to them, outside of what they may have traditionally used. 

Many fast-growth businesses have already grasped this concept, as the Index found they were five times more likely to seek alternative funding than their stable or declining SME peers.

Being aware of alternative products, including debtor finance, means that when opportunities arise brokers have the contacts and the knowledge to make the most of those prospects and provide their SME clients with better access to credit.

The next step is identifying debtor, trade, progress claim and asset finance deals.

Extracting such information can take time, but when it comes to bottom-line questions, there is only one thing a broker needs to ask: “Is a lack of working capital hampering your business?”

From there, more specific questions can pinpoint whether alternative funding is suitable. Do they have high levels of growth, rapid growth, or are they regularly impacted by seasonal issues?

Are they planning acquisitions, landing a big new client, or undertaking succession planning? Are they raising progress claims under the Security of Payments Act? Do they have significant plant and equipment or property available to fund against?

In all of these situations, Scottish Pacific works with brokers to put in place suitable funding, while they get to maintain the close relationship with their clients.

By separating real estate security from business funding, brokers open up new opportunities to help clients with home loans, lease finance and other financial products.

A client might come seeking a loan or overdraft, but don’t be afraid to put broader options on the table – options that provide viable solutions in strong times and in tough – and that will grow as they grow.

Life’s all about choices, and there are many very credible choices when looking for working capital funding.

The SME sector is hungry for working capital alternatives, and brokers interested in diversifying are in a prime position to be the trusted advisers helping those within the SME sector to expand their business funding horizons.

Peter Langham
Scottish Pacifichave