SMEs rejected by banks for finance are mostly turning to their family and friends for help, new research has revealed, pointing also to a rise in alternative sources of funding and their growing popularity among SMEs.
One in four SMEs has been rejected by a bank when seeking a business loan, with businesses below the age of five more likely to suffer a setback (38 per cent).
These high rates of rejection by traditional lenders have mostly seen SMEs turn to family and friends for help (42 per cent), but one in three are now looking to alternative lenders as an option to source funding.
When SMEs are knocked back by a traditional lender for commercial finance, it can seem like an easy option to rely on family and friends as a source of funding. But money and mates have the potential to be an ‘oil and water’ mix — and in the current pandemic, options to borrow from personal contacts could be limited.
Even when friends or family are willing to provide funding, without clear terms and conditions in place, misunderstandings can easily occur. This can cost the SME owner a valuable personal relationship. In the worst-case scenario, disagreements can escalate to the point where the parties become embroiled in costly legal action.
At the same time, SMEs are becoming more aware of alternative lending options available to their business, with the percentage of awareness rising from 30 per cent in 2018 to 36 per cent today.
It’s great to see that Australia’s small-business community is becoming aware of specialist SME lenders.
This is giving more businesses the opportunity to access the funds they need to navigate the current challenging conditions — or to take advantage of the upscaled and extended instant asset write-off and invest for future growth.
Unlike borrowing from friends and family, having access to alternative lenders will give business owners a clear upfront picture on what other finance solutions are available to them.
This allows business owners to make an informed judgement on the likely return on the items being funded, be it trading stock or capital assets.