Finance 23 November 2016

Why more choice doesn’t always mean better small business finance options

There are alternative small business finance solutions that may be more suitable than one-time lump sum debt or equity funding

Writing for Business Advice, Steven Renwick, CEO and founder of cash flow solutions firm Satago, considers why entrepreneurs should think carefully before choosing a small business finance model.

With traditional sources of finance coming under pressure, owners of fast-growth businesses are actively looking beyond the mainstream.

It sounds perfectly logical that the greater the range of options you have to access working capital, the more control you will have over your business and its future. That is not necessarily the case.

While the growing number and variety of finance players in the market can be viewed as a positive development in the support of small businesses, there are also real dangers – perhaps the most acute of which is the likelihood of companies accepting unsuitable financing for their needs.

Of critical importance to companies seeking capital is whether a lump sum is preferable, or whether a drawdown facility – allowing funds to be drawn in tranches over a longer period of time – is the better option.

Indeed, while it can be reassuring to have a lump sum (for example, in the form of a loan or investment via crowdfunding, or through family and friends) and know the money is there, if it is not all required immediately, there can be unnecessary drawbacks to receiving such an amount in one go.

Costs, such as arrangement fees and – if debt – the interest that must be paid on such a sum, are of course a key consideration. There is also the psychological impact.

Often, receiving a lump sum can generate dilemmas with respect to strategic decision making, with people either feeling they must spend the entire amount because they are paying for it – and potentially ending up with working capital issues (due to overtrading) – or becoming caught in the headlights and not spending it at all.

With equity investment, other concerns come into play. These include the fact that any external investment – even from friends or family – inevitably brings with it external influence.

With significant amounts in play, there is no such thing as a silent investor; all equity holders will want their say in business strategy, which could result in a significant impact on your company’s direction and business model.

The consequence of this could mean that you lose full control of the company that you have worked so hard to build – and potentially diluted your ownership unnecessarily.

Prior to accepting such a facility, parties should therefore satisfy themselves that they understand the likely impact of both debt and equity investment and funding on the business – as well as the business model itself, all parameters and timescales involved, and any potential conflicts with the lender or investor.

With debt facilities, there can be heavy controls put in place by the lender in terms of structure, security, pricing and complexity.

With equity, the impact on your control over operations can be deeply undermined – meaning that lump sum funding in either form can potentially exact a heavy price on your business.

On-demand small business finance

Thankfully, where a lump sum is not a necessity there are further more attractive options, perhaps the most flexible of which is selective invoice finance.

Here, businesses can borrow funds as and when needed – on demand. Instead of drawing a lump sum unnecessarily or requiring a costly “whole ledger” facility, small businesses can select which pre-approved invoices they want to draw on.

What’s more, they can also selectively draw on the invoices they know will be repaid the soonest – enabling business owners to minimise their accrued costs.

This also allows for greater transparency regarding charges. In fact, deciding how much you want to borrow, when you want to borrow, against which invoices, for how long and at what price, will almost certainly help to minimise the expense of a financing facility.

While invoice financing is not new, the technology is. Today, it is possible for small businesses to allow selective invoices – rather than their entire ledgers – to be utilised for invoice financing facilities. It’s a phenomenon that is turning business owners into their own bank managers.

The key to such an offering is the ability for providers to integrate with business accounting packages seamlessly. This allows them to monitor businesses in real-time and gain enhanced insight into payments and cash flow at a glance – enabling risk to be assessed more effectively.

Certainly, there are situations where a lump sum may be desirable. However, purely accepting a lump sum because it was offered, or taking the very first option from an internet search, could result in poor-fitting finance that impacts the bottom line or even the entire business model.

It has never been more important for company owners to realise that there are alternative small business finance solutions that may be more suitable than one-time lump sum debt or equity funding; those that enable companies to have the right level of cash at the right time.

Thanks to technology, this is becoming ever-more applicable.

With the advent of on-demand small business finance, the market has changed. It is therefore critical for advisors to be fully aware of the new funding options available to their clients.

Today, cloud accounting software has made funding even easier by the introduction of simple add-ons that integrate directly with their solutions.

Equipped with the right guidance and the right tools, small business owners can feel confident they have a facility that can work most effectively for their company – and support their growth aspirations.

Steven Renwick is CEO and founder of Satago.

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