How SME Owners View Debt

Welcome to Thriver’s short reads about investing in SME debt and how the SME debt market works. You’ll read them faster than you finish your cup of coffee.

Borrowing by SMEs represents $400 billion in debt that is growing at 6% a year. There are 170,000 SMEs who have at least $2 million in revenue and need money to grow further.

So, how do SME owners look at debt?

Our friends at the Productivity Commission had a look. They estimated that, in 2018-2019, about 25% of SMEs who turnover more than $2 million applied for debt. That’s higher than the overall average of 15%, reflecting that owners of bigger SMEs often don’t personally have the money needed to fund growth.

The PC’s stats back that up: the most common reason for applying for debt (47%) was to maintain short-term cash flow or liquidity. Replacing or upgrading equipment – machinery, IT gear etc – came in second at 41%.

Digging into 2017-2018 numbers, the PC found that 47% applied for short-term products – credit cards, overdrafts, loans, lines of credit – with terms of 1 year or less. This reflects that:

• SMEs start out needing occasional funding to cover a gap but, as they grow, those needs become more frequent and often permanent
• SME owners often don’t know what their debt options are. Why use a credit card to buy a machine that will work in your business for the next 3-5 years?

If an owner has built a business to $2 million turnover, they are a smart, serious and committed businessperson. They’re good at what they do. They know that they need outside money to keep growing. But many of these smart people don’t know their options and are apprehensive about assessing them. It is literally outside their comfort zones. Too often, they choose a ‘solution’ without evaluating alternatives and the consequences of their choices.

Those consequences can snowball to the point that the cost of debt can threaten the profitability of the business. It is unsustainable and frustrating for the SME owner.

Thriver provides innovative, well-thought-out, fairly-priced finance solutions with quick turnaround for businesses needing between $250,000 to $1 million of debt. We understand that smart business owners want someone who can recognise their changing requirements and work quickly to get funding in place.

Next time, we’ll look at the necessity of debt.