Decreasing home ownership hitting SMEs
With the decreasing rate of home ownership in Australia, SME owners will be forced to look for alternative funding sources outside of the family home, warns one capital financial provider.
Scottish Pacific chief executive Peter Langham said millennials will seriously have to consider how to fund growth if they are locked out of the real estate market.
Mr Langham said there has been a 25 percent drop over the past two decades in the number of Australians owning their home outright.
The property scenario is especially stark in capital cities such as Sydney, he said, with recent data from CoreLogic indicating that more than two out of every five house sales in Sydney over the past year sold for at least $1 million.
“With many millennials expressing a sense of futility about saving for a home, and feeling priced out of the market, this will invariably impact the use of property as security for business working capital,” said Mr Langham.
“Currently many SMEs fund their business by bank overdraft, using their property as security. If future generations of SME owners do not own property, they will need alternative methods to fund growth.”
Mr Langham said start-up or fast growth businesses often find it hard to secure enough working capital to sustain growth.
“Growth can put an enormous strain on cash-flow. We see it all the time – a business wins major new orders, but the frustration comes when they turn it down as they can’t wait up to 60 days to get paid, they just can’t fund the extra staff required or extra orders needed,” he said.
“Those businesses looking to banks for overdraft facilities have to have enough equity and are invariably asked to provide real estate security.”
Mr Langham said millennials will need to look for alternative sources of finance such as debtor finance where the business is given an advance on the money already owed and the available funding grows in line with their sales.
“Both debtor and trade finance give the business improved buying power, which allows them to negotiate supplier discounts for early payment and to avoid having to offer costly settlement discounts,” Mr Langham said.