A cooling property market could be bad news for small business lending, according to one funding specialist.
With residential valuations falling and lending restrictions and interest rates set to increase, Australian Invoice Finance (AIF) has warned that small business owners who use their homes to secure business capital face an increasing risk of a credit crunch.
The invoice-based funding specialist said that what once seemed an easy source of capital for SMEs could turn out to be more restrictive and expensive than before. This follows the drop in the national value of dwellings for the seventh consecutive month in April.
AIF Managing Director Greg Charlwood said, “The average value of Sydney houses has fallen 3.4% over the past year. If this downward trend continues as borrowing costs rise and APRA demands tighter lending standards following the Royal Commission, small business owners may regret using their home as a bank and mixing their personal and business lives in this way.
“With interest rates widely expected to rise, servicing the cost of a business loan on a residential property will increase, reducing business revenue yet the business owner may not be able to borrow more if he or she hits a tough spot and needs more working capital. Business is uncertain enough without the added worry of whether you will have credit available when you most need it.”
Charlwood said smaller business owners should look beyond traditional funding sources which could risk their family home, suggesting instead invoice financing. This alternative financing solution provides businesses with upfront cash payments against account receivables, helping to smooth out cash flow volatility and overcome issues while satisfying short-term financial obligations.
Charlwood added, “We understand the importance of recognised revenue and how SME businesses experience difficulty in attaining proper credit without substantially increased risk. Interestingly, our global research shows that SMEs in other parts of the world, including Europe, are becoming equally concerned and invoice financing has been one of the fastest growing financial products for businesses worldwide in recent years.”
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