Why lump-sum investments can be a poor fit for SME financing

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Steven Renwick, founder and CEO, and Julie Warren, head of sales and marketing, at cashflow solutions firm Satago explore why lump-sum injections may not be the right answer for SMEs seeking investment.

We live in an ‘on demand’ world – at least when it comes to television and music streaming, online banking and e-book purchasing. So why are we stuck in the previous century when it comes to SMEs seeking sources of investment or working capital?

For most businesses – especially SMEs – capital needs are often satisfied through the well-trodden path of either an inflated lump-sum debt injection or an equity investment. Both result in funding way beyond what most SMEs need at any given moment, resulting in unnecessary challenges and complications.

Nimble companies can quickly become overwhelmed by large funding injections. In the case of lump sum debt funding, not only is there the considerable expense, but such facilities can also come with extensive covenants imposed by the lender – including encumbrances preventing further capital injections. Then there are the rigid terms and conditions, including financial reporting stipulations and a lengthy on-boarding process.

What’s more, such a large capital injection can lead to anxiety over how to allocate the funds. Indeed, fraught by the prospect of either using lump-sum capital simply because it’s there, or deterred from using it due to uncertainty (and, in the case of debt, the looming repayment schedule), SMEs can become burdened rather than empowered by accepting lump sum funding.

And with respect to equity investment, there is the inevitable issue of owners conceding full control of the business. With business models and plans painstakingly developed over time, the potential conflicts with “not-so-silent” investors can prove highly disruptive.

A new era of flexible finance

There are many factors for SMEs to consider when seeking funding. Yet, thanks to advances in technology, a new type of financing is opening up to SMEs: invoice financing. Of course, invoice financing is not new – factoring and forfaiting have been commercial funding staples for decades. Yet invoice financing has undergone a fintech overhaul that, crucially, now allows selective invoices to be financed rather than entire ledgers.

SMEs can seek the right amount of financing for their needs – near instantly and on demand – by drawing on individual invoices that suit the CEO’s immediate needs. For instance, they can select those that are likely to be repaid the quickest (and therefore cost the least to finance) – a dramatic transformation that is granting business owners greater oversight of their financing costs and, in effect, turning them into their own bank managers.

The key technological advancement for invoice financing is the ease with which providers can seamlessly integrate their applications with business accounting packages – allowing them to both monitor businesses’ cash-flows at a glance and assess risk more effectively.  

Of course, with all financing, suitability is king. But if a lump sum is not a necessity, by leveraging technologically-advanced invoice financing applications, small enterprises can drive their growth strategy while also staying in control of any capital injections.

About Steven Renwick and Julie Warren

Steven Renwick

Steven Renwick is founder and CEO, and Julie Warren is head of sales and marketing, at cashflow solutions firm Satago 

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By DJKL
22nd Nov 2016 14:58

Of course such on demand funding runs inherent risk that the environment changes and when needed such funding is not available, terms/conditions etc have changed in the interim as the market has suffered shocks (think banking 2008-2012)

What we learned from the downturn is having longer term agreed funding and balance sheet liquidity was very desirable-those parts of our group with this sort of financing rode out the storm reasonably well, those with shorter term funding were far more at the mercy of extant funders and a difficult market to replace said funders if/when required.

We have accordingly cut our cloth to fit the current climate, the replacement facilities currently in process of being drawn (it has been a long process) will for this reason leave us with circa three times the suplus cash on balance sheet for this very reason; whilst we could live with say £50k ready access cash, and I would have in the past say operated with £150k cash on balance sheet for safety, at this renewal we are going to be running with circa £500k of cash held-in effect once bitten twice shy, main lenders are fickle, the economic climate with Brexit and Scottish Independence is uncertain, and we are happy paying say 4% per annum on an extra £350k in cash for peace of mind.

In essence the behaviour of the banks etc over recent years does not inspire confidence that they will extend funding when needed; A lender:- someone who will lend you an umbrella when it is fine and ask for it back when it starts to rain.

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