Home Finance Why there is an ‘opportunity cost’ for SMEs fearful of debt

Why there is an ‘opportunity cost’ for SMEs fearful of debt

by jcp

By Stuart Lawson, Chief Commercial Officer at Funding Options

For many, ‘debt’ carries such a stigma it can be hard not to be overwhelmed by the mere mention of it. But if debt remains the looming spectre for your business, it will restrict the velocity and scale of potential growth for both SMEs and the wider economy.

There’s an ‘education’ piece missing for many business owners around some of the really innovative products that are out there now – and arming yourself with the knowledge will mean you can turn debt into a positive and avoid the opportunity cost of sitting tight.

Economically speaking, the UK relies heavily on its SME community – constituting 99.9% of the UK’s business population and responsible for 61% of employment. Your growth and success is going to be pivotal in driving the nation’s economic recovery post Covid-19.

At a small business level, financial admin is understandably unpopular, so owners have historically been less adventurous in how they look at funding. This has created a core of permanent ‘non-borrowers’.

The tide may be turning though. According to the BVA BDRC SME Finance Monitor, in Q2 2021, 61% of finance users said they were using more finance now than pre-pandemic (with 36% borrowing for the first time). In particular, alternative finance providers are seeing more businesses approaching the subject of financing in a more creative way – moving towards alternative lenders and the speed and flexibility they can provide.

In being forced to seek quick funding from alternative lenders rather than incumbent banks, many business owners now have an increased awareness of the various funding options available to them. Those who are not aware or too nervous, however, may experience a significant opportunity cost when it comes to growing their businesses. If we are to move further from the mentality of surviving to thriving, then the mindset around business debt needs to change.

Debt as a facilitator of growth, not a personal failure

The fact we are so conditioned to think of debt as bad could result in a significant opportunity cost for SMEs. Many are missing out on the opportunity to scale, and even more are missing out on the options made available to them by alternative lenders due to a lack of awareness and education.

But when managed properly, debt financing can boost your business. It can drive growth and innovation without the need for owners to relinquish their autonomy, unlike equity financing.

There are clear benefits to debt such as being able to negotiate better rates from suppliers for larger orders, the ability to be agile according to demand such as hiring staff, expanding premises, purchasing vehicles, machinery or equipment, or making bigger orders. Being able to borrow £50,000 to invest in more stock, as one business I know did recently, could lead to the business making a healthy return on investment. In that instance the company generated £150,000 from the exercise.

It’s time to think laterally about the wide range of products that might suit your needs, such as merchant cash advance or revolving credit facility products, which offer growth finance based on your sales and greater flexibility. Or exploring payroll, invoice, and asset-based finance to line up alongside your standard loan facility. This doesn’t automatically put you in a precarious position – as long as you understand how one debt product functions and what you can afford as you grow, it can provide all-important extra working capital to do what you want. There’s a lot of information readily available online and it’s something we try to offer through our Knowledge Hub too.

How else can a more positive mindset around debt benefit SMEs? It’s a bit of a Catch-22 situation, but you need to borrow money in order to raise your credit score, and to borrow money in the first place you need to have a good credit score. But once you get past the initial hurdle of your first business loan, taking out loans and paying them back sets your business in good stead for future borrowing. Consider starting off with smaller business loans, paying them back in a timely manner, and gradually working your way to borrowing a more significant amount of growth-facilitating capital.

Having debt can almost be like a form of networking. In the process of securing a business loan and paying it back, business owners can form relationships with financial institutions and other debt holders. Paying loans back on time will also increase your businesses’ credibility in these circles, reinforcing and growing your network.

Why should you consider an alternative lender for your business financing needs?

As with many other industries, the past two years  has driven an unprecedented level of innovation and creative solutions within the UK fintech scene, in particular amongst alternative lenders.

Many of these innovations make the process of securing and receiving a loan far quicker, simpler, and more efficient for business owners. One of these is increased use of Open Banking. Although it is not a particularly new development, Open Banking usage did see a significant level of adoption over 2020. Not only this, 55% of lenders planned to adopt Open Banking technology by the end of 2021, with 93% of those businesses expecting to adopt the data-sharing initiative in the next 12 months, according to the recent data by credit management platform, Know-it.

This benefits business owners as Open Banking minimises the amount of work applicants need to do to secure a loan. Rather than applicants needing to send bank transaction documentation to lenders, Open Banking APIs facilitate the immediate sharing of an applicant’s transaction history with lenders.

This technology, in conjunction with others, enabled Funding Options to achieve a new record of just 20 seconds from loan application to credit approval via Funding Cloud. Since then we’ve seen that process repeated at great speed, with one company also drawing down the approved loan within just 18 minutes. This now means a business owner could apply for a loan and have the cash in their bank account during their tea break, something that would’ve been considered an impossibility not so long ago.

A cut in VAT and political rhetoric encouraged consumers to ‘spend spend spend’ to assist economic recovery after the 2008 financial crash. Delivering the same memo to SMEs today would certainly boost the UK’s Covid-beleagured economy. But telling SMEs to increase spending doesn’t mean that business owners should take on reckless debt. Rather, it means to do your homework on the right finance option and  ‘spend spend spend’ on the business itself, balancing financial products to drive growth and take businesses to the next level in an affordable and responsible way.

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