Smart Ways for SMEs to Raise Funds — Part 2
The amount of finance SMEs source outside of banks has grown to 20% — so what are the best options?
In the first instalment of this series we looked at how newer businesses can put together startup finance.
This week we’ll move on to see how established businesses can keep up a healthy cash flow.
Revenue-based Financing
When a business is trying to grow, servicing large fixed debt repayments can be challenging. Revenue-based finance can lighten the load, by providing a loan that bases repayment amounts on the business’s income for the month.
Pros
For business owners, this option is a sort of ‘equity light’. Rather than permanently handing over a share of their enterprise, owners only pay while the debt is being serviced. They cover the initial value of the loan, plus an additional multiplier negotiated in advance.
This is especially useful for businesses that foresee some variability in their revenue, like those dealing with seasonal demand.
Cons
When a company successfully achieves substantial growth, the fixed loan repayments that once seemed burdensome might become fairly inconsequential.
However, if repayments are linked to revenue, the amounts will escalate alongside profit. A lot of businesses use their boom months to generate investment capital, but that’s going to be harder when more money is leaving the business.
Types of Funding Obtained by UK SMEs
Asset Financing
Asset financing is a little like taking your family jewels to a pawn shop. Valuable assets that the business owns are held up as collateral against a loan, and forfeited if the loan is not repaid. This could include anything from the company’s printers, real estate, to the vehicle fleet.
Pros
This is an easy form of finance for businesses with poor or non-existent credit ratings to get hold of. Because there is collateral in play, they really have nothing to prove other than their ownership of the asset.
Having collateral also means that this kind of debt is cheap compared with unsecured forms of borrowing, potentially saving a lot of money in the long-term.
Cons
It’s pretty straightforward — if you can’t bear to part with it, don’t risk losing it. This kind of finance is not to be taken lightly, and should be reserved only for situations where the business has total, iron-clad confidence that it will pay off the debt.
Although there’s nothing wrong with responsible asset financing, it’s often a last resort for businesses with short-term difficulties; over 60% of asset financing goes to SMEs.
Invoice Factoring
If asset financing is like a pawn shop, invoice factoring is more like a payday loan — albeit one with far better terms. Invoice factoring is technically a form of asset financing, because accounts receivable are an asset.
However, most businesses feel more comfortable borrowing against money they’re owed than against vital equipment, which is probably why this kind of finance has grown around 60% over the last two years.
Pros
Once again, businesses do not need a fantastic credit history to receive this kind of payment. Factoring also solves the problem of long wait times between supplying an invoice and having it paid; recipients can usually get between 70–90% of its value within a few days.
Cons
It’s only too easy to become reliant on this kind of debt, and businesses can soon see the profit margins on invoices getting eaten up.
65% of larger SMEs frequently experience late payments. If this is a recurrent problem for your business, you’re within your rights to impose a late payment fee. Alternatively, you can raise your prices, and introduce a prompt payment discount.
Raising funds is one part of keeping on top of cash flow — saving money is the other. If you want to reduce spending on your business telephony, get in touch with CircleLoop now.
