Instead, small businesses are struggling to access the capital they require, in large part due to the complexity of the loan process – and this is creating a funding gap and holding back significant jobs and growth opportunities for the Australian economy, according to the State of Lending Report from accounting software company Xero.
The lack of funding is also contributing to the struggle by small businesses to hire extra staff and make core business investments.
Xero’s research claims one in five small business owners (22%) say access to capital is the greatest pain point or perceived threat to their long-term growth aspirations, with a quarter of small business not very confident in their ability to invest in the business.
If they could be assured of funding, Australian small business owners said they would consider borrowing an average of $85,562 in the next 12 months and $159,641 over the next five years – and this additional funding would be used to hire an average of six extra staff in the next 12 months and 16 extra staff in the next five years.
If the funding was available, the areas in which businesses say they would invest are:
- Marketing (61%)
- Equipment (46%)
- Hiring more staff (31%)
- Systems and processes (30%)
- Materials (25%)
The research also claimed that two-thirds (67%) of small business owners who are focused on growing their business long-term will primarily fund the growth through business profits, while close to one in five (19%) will primarily rely on personal savings. Only 8% of will primarily fund the growth through a business loan.
Xero claims Australian start-ups are shying away from pursuing business loans.
Only 9% of small businesses took out a business loan to start their venture, and of those that didn’t apply for a business loan, most relied on their savings (71%), while 16% either re-mortgaged their homes and/or took out additional credit card(s).
“Small businesses are the engine room of the Australian economy, and most have clear aspirations for growth; however the fact is that access to capital continues to be an issue for many,” says Ian Boyd, Financial Industry director at Xero Australia.
“The responsibility to fix this funding gap doesn’t sit squarely with one group. Government, financial services firms and the accounting sector all have a part to play in helping small businesses understand the options for financing, as highlighted by the Australian Small Business and Family Enterprise Ombudsman in June.”
Xero notes that the ASBFEO 2018 report — Affordable Capital for SME Growth — outlined that education for small businesses in the range of financial products available and how to access them is crucial, and found that for many, accessing finance through a business loan is perceived as either too difficult or too expensive.
And Xero says its research affirms the calls from the ASBFEO for more businesses to adopt online accounting platforms to boost their chances of obtaining finance:
- Four in five (80%) small business owners believe that documentation and other requirements in obtaining a business loan for small businesses are onerous, while the large majority (76%) believe that obtaining a business loan is difficult for small businesses.
- Among small business owners who have borrowed from a lender, 42% said the greatest difficulty was manually providing financials to the lender.
- Among those who borrowed from a lender or applied for a business loan, close to two in five (39%) think the application process for obtaining a business loan is more stressful than buying a property, while more than half (51%) think it is as stressful as buying a property.
“Accessing finance can be incredibly stressful for small business owners, with it often having significant implications for their future and the future of their workforce,” Boyd says
“Getting the right support at these times is critical, and we strongly echo ASBFEO recommendations for small businesses to work closely with bookkeepers and accountants to get their business finance-ready. This will not only help them understand the lending options available to them, but also ensure they are keeping orderly books so as to boost their chances of loan approval.”
Xero claims technology could help close the funding gap, with the research revealing that:
The large majority (71%) of small business owners would be interested in applying for business funding if there was an electronic process to do so.
The Xero report also claimed that small business owners would like technology to play a larger part in facilitating the process of obtaining a business loan. For small business owners, the most appealing benefits from incorporating better technology in the process would be:
- getting a lower interest rate on the loan (87%);
- getting the application approved sooner (86%); and
- less time and effort spent on the application (85%);
Access to more lenders and getting the application in sooner would also be highly valued by the vast majority (84% and 83% respectively).
The most commonly cited ways in which technology companies can play a greater role in boosting the growth of small businesses are technology that:
- saves time and resources (84%);
- tackles cash flow and payment difficulties (61%); and
- provides easier ways to share financial data safely and securely with lenders (46%).
Xero says it is already working with lenders to improve small business access to capital, and its recently launched bank feeds API will expand the number of lenders and banks who can integrate with Xero.
“This is a combination of having access to up-to-date data, coupled with the support of their accountant or bookkeeper. We’re committed to helping small businesses get access to capital by investing in this space to help close the funding gap,” Boyd said.