SME Index Insight Series: Best SME growth outlook in almost 3 years

Our Scottish Pacific SME Growth Index is a twice-yearly snapshot of Australia’s small to medium sized business sectors showing cashflow issues that many businesses face today, below is the first of six key insights found in our September 2018 report:

Best SME growth outlook in almost 3 years

In a boost for the SME sector, more businesses are in growth mode than at any time since March 2016. One in two (51%) are forecasting positive revenue growth in the next six months.

The average projected revenue increase of 4.5% is the strongest level of sentiment since 2016 and reflects a promising rebound in underlying business confidence within the SME sector.

For those predicting revenue gains, the range of growth was 1.5% to 6.1%. However, the average growth rate predicted by SMEs has halved since the initial 2014 SME Growth Index.

More than a third of respondents (37%) identify as growth businesses. It is these businesses who are really feeling the pinch from cash flow issues.

Growth SMEs say that with better cash flow they would have achieved an average revenue improvement of 27% over the past year, compared to the mere 6% average revenue increase predicted by declining growth and no change SMEs.

This suggests growing SMEs are trying but failing to allocate capital to growth elements such as hiring new staff, acquiring new equipment or opening up new offshore export markets. The Index found that 59% of growth SMEs are seeking additional finance or capital to fund their projected growth, with one in three looking to borrow $50,000 – $250,000 and a similar proportion seeking $500,000 – $2million.

The percentage of business owners intending to fund growth via their main bank continues to fall (22.5%). This two basis point drop over the past six months reflects a four-year trend away from bank borrowing by growth SMEs.

Warning signs as growth sentiment clashes with weak property outlook

There’s the very real potential that the relatively weak outlook for capital growth in property will put the brakes on the emerging positivity around SME growth prospects.

Analyst CoreLogic’s July Hedonic Home Value Index has reported that Australian property prices have experienced their largest annual fall in value since August 2012, with five of the eight capital cities, including the major markets of Sydney and Melbourne, slipping in value.

This trend is expected to develop further throughout 2018 and beyond, and will continue to be impacted by tighter lending conditions and other outcomes from the Royal Commission into Banking.

Even without a major correction – if it’s just a case of the heat being taken out of the property market – this could have a significant impact on the growth prospects of the vast number of SME business owners whose enterprise funding is linked to the value of their property security.

When we asked last year, one in 10 SMEs (11%) said they had adjusted product and service demand as a direct result of house prices.

If SMEs are going to fund growth, they may need to seek funding outside property secured lending.

East & Partners predict non-bank lenders will emerge as a viable alternative for SMEs struggling to cope with the interconnected issues of a slowing housing market and improved growth forecasts.

The incentive of not having to borrow against a business owner’s ‘bricks and mortar’ residential home is a major advantage of using alternative lending. This benefit was cited by almost 19% of SMEs, coupled with the independently nominated factor of being able to avoid using non-property assets as security and personal guarantees (17%).

The picture for SMEs not forecasting growth

Almost half the SMEs polled do not foresee growth in the six months to March 2019. About one-quarter expect revenue to hold steady, and one-quarter expect revenue to decline, by an average of 6%.

The current range of predicted revenue decline (4.8-13.7%) is almost double that of 2014.

The combined percentage of consolidating/contracting SMEs has almost doubled since 2014 (from 13%, up to 25%), posing a considerable downside risk to broad-based sustained economic growth.

Like to know more? To download the latest copy of our SME Growth Index, click here.

Our next release will be available in March 2019 and will be available on our website.