10 Things Every SMB Should Understand About FinancingBy Jorge de Lara | Tue, 07/13/2021 - 12:52
As economies begin to recover momentum and markets become increasingly eager to reactivate their operations, the behavior of small and medium businesses can be an eloquent indicator of the shifting context societies face.
According to the 2020 Business Demographic Study carried out by the Mexican National Institute of Statistics and Geography (INEGI), around 20.81 percent percent of micro, small and medium businesses permanently closed their doors last year, while 619,433 new SMBs where born, representing 12.75 percent of all businesses in the country.
Such a reality, not in small part a consequence of the many challenges global markets faced in the past 18 months, demands innovative approaches and platforms that enable dynamic entrepreneurship. The rise of new financing solutions fueled by technology has consolidated into what is now commonly referred to as fintechs.
Fintechs join an evolving financial sector, becoming yet another approach within an increasingly diversified industry. The presence of varied options usually works in benefit of the target consumer, and this is not an exception for SMBs looking for the best path toward resilience and growth.
Yet, a wide array of possibilities also requires a better-informed market, and when a decision can become a decisive factor in ensuring the future of a company, such understanding becomes, in fact, critical.
Here are 10 things I believe need to be considered when looking for a financing solution that can not only safely meet business demands but that can foster growth.
- Macroeconomic perspective: This assessment should be part of any mid and long-term decision made in a company, but it is crucial when it comes to financing given the impact a potentially volatile economy can have on the viability of a business.
- Age of the company: The time a company has been operating tends to work in favor of getting financing options more easily. Longevity is, of course, not always a reality for SMBs, but it remains important to understand how it affects access to better financing solutions to evaluate if an approach makes sense and when to best leverage it.
- Terms of financing: The conditions different financial institutions offer should always be carefully evaluated, but while large operations usually have more resources and experience when considering terms, small businesses can be an easy target for abusive or unclear deals. Being well informed is essential for a growing SMB not to become a victim of the market.
- Credit history: It’s important to remember that generating and keeping a good credit history goes a long way in facilitating financing and opening better options down the line. Keep this in mind as the snowball effect credit histories generate, both positively or negatively, can determine whether you are paving the way toward long-term success or gradually stunting the growth of your endeavor.
- Objective of financing: This one might seem obvious but it’s not uncommon for businesses to simply assume they need financing to operate in a certain way instead of stopping to evaluate whether this is the best course of action. Even if you are convinced financing is needed, without a clear objective on how, when and where to use it, a company can easily end up covering for redundant processes, making purchases out of time or even outright wasting it on avoidable costs.
- Cost of financing: Financing comes with a cost, most commonly in terms of interest rates which can be fixed or variable. Interest rates can be a tricky thing, as they, in some ways, make the actual cost of financing less obvious. It’s crucial to fully understand the conditions of each option and what it translates into within a given time frame.
- Liquidity recovery periods: The time between purchasing raw materials, stock, or machinery and recovering an investment represents one of the most vulnerable periods for companies given that operational and fixed costs need to be continually covered. The length of a recovery cycle can vary depending on the nature of each business, with longer cycles usually increasing the need for financing. It’s important to fully understand this motion given that financing costs tend to go up when covering longer periods. A recovery cycle should always be optimized for sustainability, even when supported by financing solutions; only then can it provide a strong operational platform for growth.
- Payment capability: This is directly tied to evaluating the cost of financing, focusing on how a company meets such costs. The ability for a business to pay for financing should be more akin to clockwork than to juggling. If the operation is properly planned, the possibility of “dropping the ball” should be virtually nonexistent.
- Industry risk: recent events have proven how unpredictable the context in which any given business operates is, but they have also shown that a company’s survival can be directly tied to its preparedness. There is no way to predict every single scenario but there are platforms of resilience that can be built and risks that can be accounted for in any given industry.
- Level of digital adoption: New, technology-driven financial solutions usually work best with companies that speak the same language. Businesses that are further on their digital journey can better leverage the benefits a fintech offers. Finding a solution that best matches your own operation, whether it’s fully digital or hybrid, can make processes considerably smoother.
Financing should not be a confusing or scary proposition. It’s a tool that should be properly leveraged for micro, small and medium business to thrive within a competitive and dynamic market. With SMBs representing 52 percent of the country’s GDP and generating 70 percent of formal employment, according to the INEGI, their success is an integral part in the growth of the economy and the development of Mexican communities in general.
Reach out and look for an alternative that meets your needs. Financial institutions are becoming more and more creative in designing alternatives that suit companies of all sizes.