While it’s the big-name brands that usually make the news, it’s the small businesses that feel the full impact of inadequate or untimely financing. Discover how “the 5 Cs” can help small businesses access better capital.
This article will take about 4 minutes to read
Timely access to financial capital has been and will continue to be a challenge for businesses irrespective of size, industry, credit rating, global presence, etc. History is littered with the skeletons of many a behemoth that fell by the wayside and even disappeared from our lives because they were not ‘bailed out’ in time or with adequate financial capital. Many of us can recall the mayhem in the aftermath of the 2008 financial crisis when some of the largest providers of capital (banks and insurance companies) either ceased to exist or had to be rescued through taxpayer money.
This will continue to happen as the post COVID-19 impact on some industries is still to be fully felt.
Seeking Capital as a Small Business
And while the fallout felt by big-name brands is usually what makes the news, it’s the small or mid-sized businesses that feel the impact of inadequate or untimely finance most. Providers of capital, investors or lenders, shy away from small businesses. They involve taking risks that could jeopardize the investor’s capital, simply because small businesses are inherently higher risk, higher return.
While there will always be such providers willing to take a measured risk in funding a start-up or a small business, their ability to do so as a percentage of the total asset book will always be capped. So how can a small business stand out in the crowd? How can it be noticed and therefore have a chance at tapping these pools of capital?
While small business enterprises and start-ups have some differences in the nature of capital they need and the sources from which to tap these, there are a few considerations that may help in managing the process of raising capital. For want of a better term, the 5 C’s:
1. Corporate Governance
Most SME promoters are so caught up with managing day-to-day operations that sometimes they do not give the attention deserved to setting the highest standards of governance and transparency early on. And yet, providers of capital look for high levels of disclosure because it’s also a reflection of the values that the management subscribes to. Promoters and management would do well to establish a reputation for being a business that can be trusted, it helps reassure capital providers that their capital will be safe.
2. Consistent Performance
Most capital providers would want consistency in performance. Not spikes but a steady-state of growth reflected in the financials, the business volumes, and the YoY rate of growth across key performance metrics. Sometimes, in a rush to win a large order, smaller businesses could over-reach themselves and find they are unable to execute because of resource constraints. Balancing ambition with reality is a useful way to decide what are the right contracts to bid for so that the business is not too stretched to deliver as that could impact results.
Doing what the business does well, consistently, gives a high level of comfort.
3. Managing Change
Small business enterprises sometimes face the challenge of being too wedded to their business idea. This then impacts their ability to adapt to changes that may be taking place in the market. Being a smaller business should allow the management to be nimble, adopting new technologies or processes, accessing new markets and customer segments as the opportunities arise.
However, this can only happen if the decision-makers are constantly upgrading market intelligence and are willing to revise business strategies if needed. This includes seeking out new pools of capital that may be available.
4. Concentration Risk
Most small enterprises, by their nature, have limited reach and are therefore constrained by a limited set of customers, markets or capital pools. This increases the concentration risk for the business. Imagine if your largest client went bankrupt. Or the economy in the market you serve went into recession. Or your largest lender or investor decided to pull back? Diversification could help. Networking to reach new customers, new markets and possibly new sources of capital is one way of mitigating this risk.
In this endeavor, digital platforms can provide a powerful alternative source for raising capital. Investor and tech entrepreneur Joe Tagliente used the platform to quickly raise seed capital for his startup, knowing that traditional institutions would take too long. Very often it is too late to pivot and shift strategy when the event has already happened.
“Digitalization has opened up my startup to more investor eyeballs than I ever could have gained through in-person networking alone. It’s helped me gain a lot of traction.” – Joe Tagliente
Lastly, investing in a culture that represents the values the business stands for is important. Smaller businesses tend to rely on the values and the culture that the promoters subscribe to. While this may be a good starting point, the business needs to develop its own culture that could be very distinct from that of the promoter/founder and one that then would attract the right talent and create the right environment for future growth.
Patagonia, the outdoor clothing company, has proven that cultivating culture is not only good for morale, but also the bottom line. The company boast a 4% turnover rate amongst their 3,000 global employees. Having started as a small business focused on creating clothes for those who lived and breathed the “outdoor lifestyle”, Patagonia has ensured that this remained an integral part of their company culture and employee relations, even as they’ve grown to generate $1 billion in annual profit.
Financial capital is attracted to businesses that attract the right human capital and more often than not, organizational culture can draw the right talent.
Former Head Strategy and Business Development at IFMR Holdings Group, and former Managing Director at Standard Chartered Bank Singapore
Seasoned financial services professional with over 30 years of experience across institutions, markets and customer segments.