SMBs Need Relationship-Based Financing and Alternative Providers Can Help

Trade Financing Matters welcomes this guest post from Calum Williamson, Managing Director/ President for Bibby Financial Services Canada

More than half of small or medium-sized business (SMB) will seek external financing at some point, according to a Canadian Government survey in 2014. But the quality and availability of financing can vary, and for SMBs with little room for error, the right choice can make the difference between success or failure of their business.

Surveying the dizzying amount of financing options on the market can be overwhelming. Traditional bank loans may be unavailable or not the right fit for SMBs current needs. Online lenders, while fast, may be lacking the business support and expertise that SMBs need to help them grow their business. But all is not lost: alternative commercial finance firms offer SMBs the opportunity to build a face-to-face relationship and develop a customized financing solution that creates a path to long-term business success.

When banks and online lending are not the best option

Banks remain the traditional source of external financing for SMBs. A recent survey showed that half of SMBs in Canada had applied for financing at their main bank during the past three years. Securing a bank loan can be a stressful and daunting experience for any business owner, especially those with concerns about their business’s credit and balance sheet or small SMBs without an extensive revenue history or high-value assets to serve as collateral.

Even when the outcome is more favorable, SMBs often find the bank financing process impersonal and focused only on the borrower’s financial statements with little or no consideration given to the quality or prospects of the business’ operations, products/services, customers and market opportunities. This approach often doesn’t leave room for developing a deep relationship with a bank that understands the strategy and business plan of the SMB.

Online lending services have emerged as a new financing option considered by SMBs. While online lenders tout their quick approval on funding decisions, the process is entirely transactional with strict financing parameters and little guidance from the provider, leaving many SMB owners feeling unsure about which selection best fits their business. 

How SMBs can find the right financing solution

When choosing a financing solution, being well-informed is especially important. Where SMB owners may feel “in the dark” with traditional financing sources, alternative commercial finance firms are available and willing to fill in the knowledge gaps while developing customized solutions through relationship-based financing.

Every day, SMBs rely on the personal relationships they’ve built with their customers, suppliers and distributors and many see the value of that same kind of personal, face-to-face relationship with their financing partner. Alternative commercial finance firms are comprised of industry specialists who maintain a portfolio of clients from various industries and take the initiative to build a relationship with SMBs. These specialists sit down with each client to outline business challenges and come up with a solution tailored to those specific challenges that draws on a wide range of available financing options, including factoring against accounts receivables, invoice discounting or asset-based lending.

For example, managing cash flow is an ongoing challenge for many small businesses. According to the 2017 Global Business Monitor, 48 percent of Canadian SMBs cited collecting payment from customers on time as the most problematic in managing their business cash flow. One answer may be a tailored factoring solution, enabling the business to access and manage critical working capital by receiving advance payments for invoices rather than waiting up to 90 days for payment from their customer. Using factoring, a business owner can receive up to 90 percent of the total sales amount even before their customer receives an invoice.

Alternative commercial finance firms often provide back-office support like accounting, payment processing and collections as part of the provided funding services. These services oversee the invoices that come through and can alert clients of any potentials risks they see or trends in late payment.

Alternative providers offer more generous financing terms that can help a new startup to get off-the-ground or an established business to get on-its-feet. In many cases, SMBs seek alternative financing as a first step to stabilize the business’s position so that it can engage with traditional financing sources down the road or become self-funding.

Actions SMBs should take before selecting financing

  • Develop a list of questions about the financing process
  • Review current financial position and understand where financing is needed
  • Decide on how quickly the financing is needed and project how much capital will be required
  • Consider what you value: the speed of a transaction, flexibility, or industry knowledge
  • Conduct due diligence and draft a list of traditional and alternative financing options
  • Reflect on current business relationships and decide if a strong relationship with a financing provider will be essential

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First Voice

  1. Glenn D Blackman:

    Good points well made, the biggest issue is that the knowledge of what finance options are available is a big blind spot to most SMEs. The market is evolving so fast at the moment it is hard to keep pace with the changes, product launches and pricing differences between providers. Our own research in the UK found that 1 in 3 were not aware that invoice finance was an option for their business – a concerning statistic. When you then consider how many variations there are on just that single product type you start to understand the scale of the education gap.

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