Finance 23 November 2016
Why more choice doesnt always mean better small business finance options
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.