Why are SME’s afraid of Equity funding?
Over the past 10 years high street banks have come under a lot of criticism in their perceived lack of support of SME businesses. This has led to many politicians and the media influencing public opinion and portraying high street lenders in a negative light. However, banks are often bombarded with proposals that they are simply not in the market to fund.
Although it is widely acknowledged that banks credit policies tightened following the events of the 2008 credit crunch, SME’s also need to understand that banks are still there to fund businesses. However, they require businesses to have a set of characteristics that include a strong historic financial performance, good ongoing prospects that will mean financial performance will be at least stable but ideally growing, and if all that is met, a strong secondary source of repayment (security) if things didn’t go to plan.
This naturally restricts many SME businesses, and directors need to understand this before raising their own expectations when approaching their banks. The number of alternative lenders has ballooned within the market in recent years in an attempt to fill this gap, however in reality they are driven by the same constraints (usually around the requirement for tangible security) of the high street lenders.
There is one alternative solution that SME’s are often reluctant to pursue: Equity!
For many, equity is not a consideration simply because business owners are very protective of their personal shareholding and there is no obvious avenue for this option to be pursued. Corporate financiers are only interested in deal sizes that produce a handsome fee, which is often cost prohibitive for an SME wanting a modest cash injection, for a reasonable minority stake. The success of this process is also determined by the strength of the corporate financier’s network, which in many cases can be very limited. Business owners are also put off by the input that external investors desire, they often charge high management fees and demand extensive reporting requirements.
However, for those that do choose the equity route, the benefits can be a game changer for their business. Having the funds and therefore the time to allow the business to properly deliver a growth strategy rather than being totally focused on the consumption of day to day business, can be the difference between business success (illustrated within business value on disposal) and years of slogging it out, leading to slow growth.
The Investx Solution
Funding a business appropriately is the key factor in the success of this growth strategy. Equity Crowdfunding is an emerging option that many businesses should consider and Investx is bringing a new offering to SME equity market. Our global platform is simple, efficient, cost effective and eliminates the common drawbacks that come with equity funding. Watch this space.
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