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A record proportion of small and medium-sized enterprises (SMEs) have planned to turn to non-bank lenders to fund growth and expansion, according to ScotPac’s latest SME Growth Index.
More than half (59 per cent) of the SMEs surveyed said they planned to invest over the next six months, with the majority (61 per cent) saying they’d use non-banks to do so.
The latest figure is more than triple the 19 per cent of investing SMEs that planned to use non-bank finance in 2019.
Meanwhile, 31 per cent of SMEs planning to use bank lending reported no change from six months ago, remaining below the peak of 48 per cent recorded in 2023.
The research, conducted by consultancy East & Partners, surveyed 727 SMEs with annual revenues of $1 million to $20 million.
On average, respondents had been operating for 16.6 years and employed 50 full-time equivalent staff.
ScotPac CEO Clare Morgan, appointed in September following Jon Sutton’s retirement, said the results reflect a growing shift in SME financing.
“SME investment intentions have remained steady for the past five years with two-thirds of SMEs planning to invest; however, the way businesses are choosing to finance that investment has changed,” she said.
“The reasons business owners are using non-bank finance include flexibility, greater choice, speed of decisions and ongoing support that reflects their circumstances.
“They recognise the value of funding solutions that can move with their business cash flow and provide the flexibility they need to invest with confidence.”
Self-funding and uncertainty
ScotPac’s research also showed that SMEs continue to rely on their own resources to fund investment, with 97 per cent of investing businesses expecting to use internal funds or equity for at least part of any new investment over the next six months, up from 81 per cent in 2014.
The proportion planning to raise new equity has also increased over the same period, rising from 11 per cent to 32 per cent.
Morgan said the findings highlighted the importance of balancing operational and investment funding needs.
“Using retained funds to invest in growth may make sense in some scenarios, but businesses need to ensure that investment does not compromise day-to-day liquidity,” she said.
“A working capital buffer helps businesses meet operating costs, manage unexpected expenses and absorb delays in customer payments. Investment capital allows them to pursue opportunities for growth.
“An appropriately structured finance solution can help businesses find the right balance, allowing them to invest in equipment, technology or expansion while also preserving their cash reserves.”
Meanwhile, the research also identified ongoing funding challenges among SMEs facing weaker trading conditions, with a record 16 per cent of businesses forecasting flat or declining revenue, unsure which funding method they would use for future investment.
Morgan said the findings reinforced the importance of reviewing funding options before financial pressures emerged.
“Businesses facing weaker revenue conditions can find it harder to access finance at the very point they need flexibility and support”, she said.
“That is why planning and diversification matters. SMEs should assess their funding capacity and available options well before making a major investment decision.”
[Related: ScotPac launches asset-based working capital solution]
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