The number of small businesses turning to banks for finance is also dropping.

A new report released this week has revealed the changing state of cash flow, finance and growth for Australian small- to medium-sized enterprises (SMEs). The SME Growth Index, released by working capital provider Scottish Pacific, found that one in five (21.1%) SMEs were unable to take on new work because of cash flow restrictions, and 9 in 10 (92.7%) SMEs said that cash flow restrictions actually prevented them from generating more revenue.

Small business revenue is heavily influenced by the business' cash flow. Of the 1,253 small business respondents to the Index, only 7.3% said that improved cash flow would not have led to more revenue. The restrictions on revenue due to cash flow has cost the Australian economy $229.8 billion.

Cash flow has been an important issue in the small business sector over the past 12 months, with various concerns around late payments to small businesses impacting cash flow. Unfair contract terms in bank loan contracts have also made access to ongoing finance unstable and unreliable.

The difficulties experienced by some small businesses when dealing with large banks may have led to an increased interest in non-bank lending.

Scottish Pacific CEO Peter Langham said the growth potential for the non-bank lending sector is significant.

“The Index found that for SMEs with plans to invest in expansion over the next 6 months, 24% plan to fund growth by borrowing from their main relationship bank – continuing a downward trend, and well short of the high of 38% in the first round of the Index in September 2014,” he said.

“Alternative lending options, including debtor finance and P2P business lending, offer SMEs the chance to fund growth without using property as security. Business owners need to know they have a credible choice when they are looking for funding."

Fintech has fuelled the growth of the alternative small business lending sector. FinTech Australia chair Stuart Stoyan said that fintech lending and finance firms are increasingly providing the capital businesses need through a focus on innovation.

“Fintech offerings include creating seamless online loan applications and software that analyses business financial data to deliver the best possible deal," Stoyan said.

“Some are also applying innovative new finance business models, directly linking investors and borrowers, or helping businesses to unlock the value of their unpaid invoices. In doing this, fintechs are providing new options for businesses."

While the sector is largely unregulated – for example, small business lenders do not require credit licences – a jointly produced report released in February 2018 by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), FinTech Australia and theBankDoctor.org shed light on the sector and is a move towards self-regulation. This is a markedly different move compared to the major banks which are currently facing the Royal Commission over their various credit activities, including business finance.

Read the full report here.

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