EXECUTIVE INTERVIEW : Peter Langham - CEO, Scottish Pacific Debtor Finance
- Around one in two Australian SMEs described their business as being in growth mode.
- SME businesses are struggling not necessarily with access to finance, but the conditions attached to the finance.
- 64 percent of SME businesses said they were putting up personal assets, such as the family home, as collateral for their business debt.
- How well are Australian SMEs being served by the traditional finance sector?
East & Partners’ Head of Markets Analysis, Lachlan Colquhoun, speaks with Peter Langham, Chief Executive Officer at Scottish Pacific Debtor Finance on the Australian SME market.
Can you describe Scottish Pacific’s business model, and the solution you offer to SMEs?
We offer a flexible working capital facility which doesn’t come with all the conditions and restrictions of normal bank finance. It is secured against the business assets, predominantly the receivables, rather than the family home.
I’d say that 95 percent of our clients would be owner managers so that’s the main emphasis in terms of the kind of clients we are dealing with. In terms of size, they could be a start-up business to a small public company turning over $300 to $400 million.
So how does your solution help their working capital requirements?
It’s basically a funding facility which is geared to the level of sales, so the more they sell the more money they are going to get, making it ideal for a growing business. Debtor finance has been around in Australia for over 25 years, and there have been a lot of people offering it, including the banks. It has limitations on who it can assist. It can’t really help retailers for example, because they don’t have receivables in the same way as other businesses. It’s not necessarily going help someone who is in building and construction, because of the contractual nature of the receivable. It works best for wholesale businesses, or labour hire businesses, some manufacturing companies, transport operators and importers.
Do you think Scottish Pacific has this market niche because SMEs have – occasionally – difficult relationships with their banks?
I wouldn’t say they have difficult relationships with their banks. What I do believe is that the banks can’t be expected to meet all the needs all of the people all of the time. So they have limitations themselves. The frustration is probably borne out of the fact that the bank says no and doesn’t refer them on to somebody else. Or the fact that the business or their advisors are not aware of the alternatives. I think that is more the frustration.
We work closely with the banks ourselves. We borrow a lot of money from the banks, we get probably 20 percent of our business from banks who can’t help customers. None of the banks offer what we offer in terms of a full suite of debtor finance products which can help businesses whether they are a start-up right through to the corporates. And that is because if you are trying to service everyone properly it is very labour intensive.
The banking business model doesn’t support employing a lot of people, to help just a few people. At Scottish Pacific, for every one employee we will probably have ten clients. That ratio just doesn’t fit within an Australian bank. If you take that model to the UK, the UK banks do what we do, and they will have those sorts of numbers. But Australian banks have a different view.
So how well served do you think Australian SMEs are by the traditional financial sector?
I think they are very well served. I discover, even now, financiers out there who are helping people who I thought wouldn’t be able to get help. So if you look hard enough you can find finance companies who have helped most people in different situations. The banks have their niche if you are the right shaped peg to fit into their holes. Outside of the banks there are a lot of companies, in our space in debtor finance, in the equipment finance space and in the property space, that if the banks don’t service, we will.
Over the years we find that businesses are struggling not necessarily with access to finance, but the conditions attached to the finance. The bank may say: “You don’t have the property security, your trading history is not strong enough or the debt to equity levels are too high” or “we can advance you the money but we will restrict how much cash you can draw out”. So it’s probably the conditions of the credit as opposed to its availability. We are finding more and more business owners are not willing to offer their home as security for the business banking requirements, and why should they?
The SME segment is quite niche in terms of finance providers, because it is outside of the bank’s sweet spot. But around the world debtor finance has been a viable solution for over 30 years, and there are an increasing number of niche lenders to help SMEs.
Do you think that Peer to Peer lending will develop among SMEs?
I think it will develop because it is quite easy. I can’t see that it’s going to revolutionise lending but it is certainly helping people who would have found it hard otherwise to get funding. I think a lot of those people would have been able to find funding if they had taken some time and looked a bit further. But peer to peer looks relatively easy, so yes, I think that it will take off.
ScotPac has just launched the SME Growth Index, executed by East & Partners. What were the findings which stood out for you?
I was impressed by the confidence of the businesses which were interviewed. Around one in two described their business as being in growth mode. And the importance of adding new products and expanding into new geographic areas was really the high proportion of that was really pleasing to see. The staggering thing for me to see was the number of businesses offering personal assets as collateral for their working capital or business finance. I was really shocked at that number. 64 percent said they were putting up personal assets, such as the family home, for their business debt.
I’m surprised that people are willing to do it, when other viable options such as debtor finance are available. The banks will normally insist on property security to provide a working capital facility. There are alternatives out there that don’t require that. They will probably be a little more expensive, but I’d encourage business owners to see it as very cheap insurance policy to keep their home out of the equation. You don’t want your personal property at risk with your business.
Did it say anything to you about the reliance SMEs still have on the four major banks as primary lenders?
The four majors will have dominance. People like being able to be banked, they have that comfort. Banks do their transactional banking, they offer most of the products that people are looking for. So I’m not surprised there is dominance by the four majors.
You have international experience. If this survey had been done overseas, would it have been different? Was there anything particularly Australian about this?
I think all SME owner managers are the same. They are entrepreneurs, they have a niche and they are good at exploiting that. But I think if you looked at the US, you wouldn’t have four banks dominating SME lending. It would be split between lots of asset based lenders all over the country. Local and national banks, no major players. In the UK, it would be dominated by the four High Street banks because they offer not just what the Australian banks offer but also a lot of unsecured debtor finance for people. So it would be different in terms of where people get their money from, but entrepreneurs are the same worldwide.
The index is important for us because we are very focussed on understanding our clients, and what drives them. We can get a better sense of what is important to them and how we can respond positively to that and help make their lives easier. We are passionate about SMEs. We love the owner manager, the entrepreneurs, the growing companies. Outside of Government, SMEs are the biggest employers in the economy, and they need all the help they can get.