Before applying for finance business owners should get their accounting and tax affairs in order to fully understand the financial performance and position of their business. Developing a clear understanding of their business and its environment is also key, as is creating a game plan for the next 6, 12, 18 and 24 months. In other words, Posthumus says, SMEs need to plan out the runway for the business.
“Develop a forecast income statement, balance sheet and cash flow. The cash flow forecast should inform your understanding of when you will need funding and how much funding you require. Given this, business owners should start shopping around for funding at least a few months before they need it to ensure they have enough time to do their homework.”
Business owners also need to establish whether they need equity or debt funding. A start-up, for instance, will likely need the former. However, young businesses that require debt funding often find it more difficult to secure finance using traditional channels. “It can be challenging to interest a lender to look at new businesses,” Posthumus says. “But funders like Retail Capital, that disrupt the traditional lending model, need as little as a six-month track record and importantly will be able to continue to support those businesses all the way through to growth phases. Once a funder has a history of the business and repayment on a facility it becomes an easier conversation when looking at new lines of credit down the line.”
When they shop around, SMEs can negotiate a pre-approved line of credit as they can secure a facility that can be drawn upon as needed. However, many of these types of agreements do have a timeframe, and if not used, the SME would need to reapply. “It’s also wise for business owners to consider taking on a minimal amount of funding ahead of time to start developing a track record with a funder as this is a good way to start a positive relationship. When the business needs a more material amount, there is already a foundation from which to start their conversations.”
Choosing a financier
As a critical first step, it is important to research the funder. SMEs are advised to develop a clear picture of the various funders available to them and the products they offer companies of their size. For example, banks may offer term loans and overdraft facilities while alternative lenders offer products like invoice discounting and working capital facilities like Merchant Cash Advance.
“When you look at a potential partner, understand their history. Do they have an impeccable reputation in the market? This is true for both equity and debt funders,” says Posthumus. “For debt funders in particular, check if they subscribe to a body that advocates responsible lending practices.”
When the business owner is satisfied that they have narrowed down their search, there are a few important questions to ask before settling.
- How does the funder treat their customers when the going gets tough? In the past year business owners have seen first-hand whether their funder is truly supportive of the businesses they lend to, and what they do to help a business trade through difficult times. While all funders are different, a major advantage of Retail Capital’s funding is that repayments are linked to a percentage of turnover.
“This effectively matches repayment obligations with the business’s ability to repay. This concept is so simple and is one of the factors that has revolutionised our product compared to traditional forms of debt,” he says. For instance, during Covid-19 Lockdown Level five, 90% of Retail Capital’s customers were not allowed to trade, and so this arrangement effectively turned off their repayments until they were up-and-running again. “The response from our customer base was overwhelmingly positive and transformed customers’ perceptions from seeing us as a funder to being a real partner”.
- Understand the fee structure of the product: No matter which funder an SME approaches, they need to fully understand the fees and all the implications before signing on the dotted line. For example, Retail Capital’s working capital product is a fixed mark-up upfront on the capital advanced. These terms apply no matter the time taken to repay. “Certainty on the total amount repayable is something our customers value as there is no need to understand multiple fee structures or compounding interest.”
- Negotiating the funding’s terms: This depends on the strength of the business application. “If you have a strong balance sheet, good assets and a steady cash flow, you are an attractive customer, all of which would aid in your negotiation,” Posthumus says. “But, as a tip, when negotiating with a funder you should be clear on what they want and focus on negotiating that specific point. It could be term, amount, rate or even repayment frequency. That negotiation should be informed by what the funds will be used for.”
By following these steps, SMEs should be in a position to engage a funder and secure finance to enable their growth and sustainability.
By Tyler Posthumus, Retail Capital Group Financial Manager