Small And Medium-Sized Businesses: The Pursuit Of Organic Growth
For multinational corporates mergers and acquisitions have long been the ‘go to’ for growth. Increasing market share and expanding the company – geographically, through revenue, or a diversified product or service offering is sometimes as simple as buying out or merging with the competition.
But for smaller and medium-sized enterprises (SMEs), the rules of the game are very different. Acquisitions can be costly and challenging. In other instances, the practicalities of an acquisition in terms of integrating new employees, clients, systems, and technology is simply more trouble than it’s worth from a financial perspective.
This isn’t to say that growth isn’t a priority for SMEs. While organic growth is often a preference (and is usually very possible) for these companies, many business owners want to accelerate how quickly they can achieve milestones and facilitate meeting these objectives. Business owners are increasingly considering financial tools and financing to support them meet these objectives. Learn more about mortgages for business owners.
Using Corporate Finance To Growth
For SMEs, there’s usually a good deal of growth that can be captured from an existing market. As a rule, most business owners and CFOs will know precisely where growth opportunities are and how to tap into them – the problem is very rarely lack of opportunity or uncertainty about how to capture growth.
Instead, the barriers to growth tend to be practical: a lack of manpower but no revenue to hire more staff, being limited by the size of the company’s commercial premises, cash flow challenges or not having enough capital accrued to make a big-ticket investment. Often, removing a single roadblock will be enough to accelerate expansion and is all that stands between the business and significant development.
It’s here that corporate finance comes in. Many SMEs use borrowing as a mechanism to unlock growth, shaving significant time off how long it would take to achieve the same results without financing.
Several financing options are available for SMEs, and the mechanism that makes the most sense will depend on the business in question. That said, working capital finance, stock finance and invoice finance tend to be among the most popular:
A working capital finance facility helps businesses access capital to cover the day-to-day operations of a business. This type of finance supports growth by providing liquidity to do things like hiring new staff, moving into bigger premises, taking on new clients, or managing cash flow better, unlocking opportunities.
Stock finance works by using your existing stock as collateral against which a lender will release capital. You can use the proceeds of the loan to support business growth. Usually used by companies that sell goods or products, this type of finance is often used to buy additional stock, to respond to increased demand or simply bolster the cash in the business.
Using invoice finance, a form of debtor book leverage, the company can get early access to capital tied up in unpaid debtor invoices or receivables. This can support smoother cash flow and improve the company's working capital cycle, which can in turn support growth.
Corporate Finance: The Current Landscape And Lenders
In the past, even the most successful small and medium-sized businesses have found it disproportionally challenging to secure corporate finance to facilitate growth. Big banks are active in the space, but many only seek to lend to large companies or offer substantial loans – at minimum, tens of millions of pounds.
For smaller companies, that’s created a real challenge when it comes to accessing finance. However, in recent years, more non-bank and alternative or niche lenders have moved into the market, recognising the demand and need for corporate finance as a mechanism to help smaller businesses grow. The influx of new lenders, paired with the cost of funds currently being so low and ample liquidity in the market, means it’s an excellent time for businesses to borrow.
Lenders tend to offer specific types of finance or serve certain industries. That said, healthcare businesses (dental surgeries, pharmacies, GP surgeries and opticians) are likely to find it especially easy to borrow – health never goes out of fashion. Manufacturing is another area where there’s significant enthusiasm from lenders to provide loans.
The rise in prominence of non-bank lenders is also advantageous for borrowers in other ways. Non-bank lenders – particularly smaller operators – are often incredibly knowledgeable, with very experienced teams in growth strategy and company optimisation. Many businesses borrowing from these lenders have been pleasantly surprised by lenders willingness to provide additional encouragement and assistance to help the borrower lending to unlock growth.
