The paradox of choice for business leaders

By Ollie Maitland, CPO & Co-founder, Capitalise.com

In his seminal work ‘The Paradox of Choice’, American psychologist Barry Schwartz discusses how in our mass consumer society, the sheer number of options available has made people anxious and paralysed by choice in their pension funds. The same effect occurs in business because all business decision makers are humans too. 

Since the 2008 financial crash the cost of creating new financial products has decreased and there has been an influx of 360 new lenders into the small business funding market. Business owners requiring funding to support cashflow or invest in talent or equipment have never had so many options available. Except that the paradox of choice prevents them from identifying the most suitable types of funding and the best terms.

When faced with cash flow issues, most business owners leave just seven days to find finance and spend just one-hour researching providers. Incredibly, 80% will only approach one lender. Perhaps that is why, despite pulling back from small business lending, the Big Four banks still control 85% of the market.

With a no-deal Brexit on the horizon, it is more important than ever for SMEs to understand the financial solutions available. SMEs represent 99% of all private-side employment and are a phenomenal driver of UK GDP. Without the baggage of legacy frameworks and systems, they can be reactive, and respond quickly to challenging circumstances. To build great relationships, accountants should reach out to clients proactively to counsel them on their options, showing off their knowledge as financial advisers. 

The value of advisers

Sourcing the capital needed to support growth within businesses can be time consuming and often expensive. With so many different finance options available to SMEs and a lack of bank managers, it can be tricky to understand which solution is most suitable and when these services should be brought on board.

Research from BVA shows that 70% of SMEs use loans, overdrafts or credit cards to finance their business with only 12% using other types of finance. This is likely down to a simple lack of education about the variety of products out there. 

Accountants now have an opportunity to expand their ability to support their business owner clients by showcasing their knowledge of funding products. To take advantage of the saturated funding market business owners and their advisers need to work together. 

Purpose before product

The simplest starting point when supporting business owner clients is to look at what the funding will be used for, this will determine its purpose. This needs to be clear before exploring what the most suitable type of product is and therefore who the best provider will be:  

Purpose > Product > Provider

Some of the most popular and effective lending products secured through Capitalise.com are also those least understood by SME owners. The below cheat sheet may be helpful for advisers looking to understand more about the various financing solutions available to their SME clients:

• Asset Finance helps businesses access the tools, equipment and machinery they need. Business owners that utilise asset finance often, can avoid hefty upfront costs by either spreading the payments out over a convenient number of months or years, or simply by leasing the required assets for as long as needed. 

• Invoice Finance allows businesses to source funds from work that has already been completed using invoices as security. Business owners can avoid the restrictive inconvenience of waiting for raised invoices to be paid by advancing a percentage of them immediately. Conveniently, businesses will also have the option to outsource their sales ledger management process. 

• Obtaining enough capital to support the purchase and production of new stock can often be the major stumbling block that holds SMEs back from quicker expansion. To avoid this, Trade Finance can help to fund the supply chain from start to finish by purchasing stock from suppliers on the business’s behalf with loans secured against new purchase orders. 

• Fluctuating turnover can really limit businesses looking to source and repay finance. If a business takes regular payments through a card reader or EPOS terminal then it may well be eligible for a Merchant Cash Advance. A lump sum is sent directly to the business's bank account with a small percentage of the total amount borrowed repaid each time it takes a credit or debit card payment. This enables businesses to run as usual even when they’re experiencing a dip in turnover. 

• Property Finance is appropriate for property investors or business owners looking to purchase their own premises. This is challenging and to help ensure that opportunities are not lost due to a lack of capital most businesses will seek property finance. Accountants will be able to advise on whether a bridging loan is needed, or a development and commercial finance loan. 

With the ever-changing economy and the influx of alternative lenders on the market it can be hard for SMEs to know who to turn to and when to act. Accountants that have been able to support their clients in this search for financial solutions will make themselves invaluable. Equally, by identifying the initial problem within businesses, the correct financial solution can quickly and efficiently be identified.