A tale of two SMEs: what distinguishes a growing business from a declining one?


What are the attributes of an SME that is growing, and how do they differ from a business with static or declining revenue?

[Related: SMEs trading banks for fintechs, poll suggests]

Twice a year, when more than 1200 owners or leaders of SME businesses are interviewed for our SME Growth Index, one of the first questions researchers East & Partners ask is what phase their business is in – whether they are starting up, growing stable, consolidating or contracting.

They also identify the positive or negative revenue change that leader is predicting for the next six months.

From there, when the Index looks at other SME issues around cash flow, new products and services, business funding and drivers of business growth, we are able to segment responses according to whether a business is growing or reports as stable or declining.

Successful growth of Australia’s SME sector is vital to the national economy, so we thought it would be instructive to take a closer look at what differentiates a growth SME from its peers, and what strategic financial and business decisions growth SME owners make.

A typical growth SME is:

  • Either already using or considering the use of alternative funding options
  • More likely to consider cash flow and red tape as a business growth barrier
  • Less likely to rely on credit cards to fund their business
  • More likely to pro-actively make arrangements with the ATO to handle tax payments
  • More likely to be planning new products, new services or both

SMEs that are growing are growing strongly – not unexpected, given the low interest rate environment. 26% of growth SMEs plan to introduce new products in 2018, 56% are planning new services and 6% are planning both.

By comparison, 87% of SMEs with declining or no change revenue say they have no innovation plans.

Growth SMEs are innovating, making them feel constrained by working capital issues as they deal with business expansion.

What is instructive is that they take a different approach to managing their working capital, being not so likely to rely on personal finance such as their credit cards to move the businesses along.

While cash flow is only one factor in the profitable operation of a business, it is a fundamental aspect of building a sustainable enterprise.

Growth SMEs are five times more likely than their non-growth counterparts to be using, or considering, funding options beyond the banks.

For growth SMEs using non-bank options, the SME Growth Index shows that debtor finance is by far the most popular working capital choice.

The non-bank working capital options used by SME respondents in 2017 were: debtor finance (used by 77%), merchant cash advances (23%), P2P lending (10%), crowd funding (9%) and other online lending (5%).

Options such as debtor finance untie a business’ growth from property security and provide a facility that grows in line with business revenue, so the business is not taking on additional debt, but rather receiving an advance on money that is already owed. In this way, the business gains better cash flow control as well as a working capital boost.

Given the prolific media profiling of the growing fintech market, these results may seem surprising. However, the Index polls SMEs with a turnover ranging from $1 million to $20 million and it is likely that most of the current fintech take-up is from start-ups and small businesses coming in under the $1 million revenue mark. The more SMEs who recognize they have options beyond the banks, the better.

The SME Growth Index indicates that declining businesses are feeling the heat. One in four SMEs forecast negative growth, with the average revenue drop of 6.4% being the highest average negative growth forecast since the Index began in 2014.

A typical SME with declining or stable revenue is:

  • More likely to use merchant cash advance to provide working capital and personal credit cards to ease cashflow
  • More likely to consider their growth is being blocked by taxes, and credit availability/conditions
  • More likely to offer discounts for early payment
  • More likely to use a debt collection company to recover debts
  • More likely to reduce their overall customer numbers and overall sales to manage working capital
  • Spending more time than growth businesses on chasing invoices
  • Less likely to be using or considering non-bank solutions

There is scope for static or declining revenue growth small businesses to look more broadly at ways to finance their enterprises that would contribute to growth.

It is those businesses who are implementing appropriate working capital solutions to get on top of cash flow impediments who are well placed to realise their growth aspirations.


About the author

Peter Langham is CEO of Scottish Pacific (ASX:SCO), Australasia’s largest specialist working capital provider. Scottish Pacific lends to small, medium and large businesses with revenues ranging from $500,000 to $1 billion. Access a free copy of the SME Growth Index at www.scottishpacific.com/news/research