Bilal Bajwa, CTO, Stenn
A lack of access to finance for scale-ups and start-ups is not necessarily a new trend but it remains an acute issue that no longer needs to be tolerated. Underfunding has compromised small business growth and success for decades and while it’s a universal problem that needs addressing, it’s felt strongly in international trade where larger companies have the resources and spending power to form long-term customer partnerships, building trust and loyalty.
The difficulty is that each year the walls continue to close in for small businesses (SMBs) who see new financing streams cut off; SMB lending dropped for a third straight year, from £18.4bn in 2022 to £14.3bn in 2023 (22%).
At a time where artificial intelligence is now shaping banking and the delivery of financial services, it’s shocking that traditional institutions are still unable to appropriately cater for the needs of SMBs. It not only means that larger companies have an unfair advantage, but it is stunting the growth of businesses that form the backbone of the global economy.
SMBs need choice and this is increasingly being provided by alternative providers. With tools that are digitally and data led, they deliver flexibility to support international trade, without the same stringent checks on operating history, credit or business plans.
More agile, innovative trading
In a world dominated by social media, consumer trends are fast moving, with some product trends beginning and ending overnight. It reflects the nature of modern international trade, which has become a fast-paced and competitive environment where businesses race each other to be ahead of the curve.
For SMB challengers, they can find themselves immediately on the backfoot if they cannot scale quickly to meet demand. For example, if an eCommerce platform spots an opportunity for investment with short-term demand – let’s say, a £5,000 investment to manufacture 500 stainless steel drinking mugs (mimicking the success of the Stanley Cup) that have grown popular following a TikTok trend. If approaching traditional lenders, by the time a funding request is approved, it may already be too late, with competitors having already secured supply contracts and customers already having made their purchases.
It’s in this scenario, and in many others, that SMBs should turn to alternative, SMB -focused, lenders to secure capital faster. What makes this process so seamless is the technology at play. Instead of relying on traditional data sets and existing relationships, alternative finance providers are able to look at the current business success, making decisions based on revenue-generation and customer data. Whilst all of this sounds like there is more information to interrogate, the use of data analytics and artificial intelligence means eligibility can be quickly, and accurately, assessed. This fast turnaround empowers small businesses to compete, seek immediate gains, scale and be agile enough to meet market demands.
Invoice financing can help avoid cashflow crunches
For many SMBs, managing cashflow can be a volatile process. There’s often fluctuating supplier payment terms and missed and late payments to contend with, which can quickly lead to a series of financial crunches like payroll issues, missing rent, inability to fund new product streams, and stunted growth.
Evidence shows that delayed or missed payments are on the rise too and it’s having a significant impact on small business growth. In fact, they have more than doubled in two years, hitting £1.6 billion at the end of 2023 (Xero).
To counter these rising pressures, SMBs require liquidity and reliable access to capital. Looking beyond traditional finance means, invoice financing is surging in popularity. This route enables businesses to sell their outstanding invoices to a third-party seller, with the capital often arriving as soon as 48 hours, alleviating any cashflow concerns from late payments.
Not only can this financial tool prevent cashflow issues, but serve as a lifeline for operations and growth with SMBs. For example, if a purchaser approaches a small-construction manufacturer for an order much larger than their usual capacity, invoice financing can provide the financial means to scale operations and complete the work quickly. It prevents the need to wait for a traditional loan that may not come through, and means the business can typically receive between 70%-90% of the invoice up front, and then the remainder once the work is fulfilled.
Invoice financing can not only prevent disruptive cashflow crunches but provide small businesses with the ability to compete with larger traders.
Digital tools that equip you for future success
It is not just short-term financial tools – like invoice financing – that are available to SMBs either. Revenue-based financing (RBF) can help them make new investments or plan future projects for trade expansion.
Revenue-based financing is an agreement that allows businesses to raise capital by pledging a percentage of their revenue back to an investor as regular payments. Businesses can then use this to fund future expansion efforts in line with performance.
For example, an eCommerce fashion platform may suddenly find a range of striped jumpers are in high demand after Taylor Swift is photographed wearing a similar style. To capitalise on the interest, the business may wish to boost short-term cashflow to fund social media marketing, expand the range of the product and have a higher production volume. Here, RBF can allow businesses to accelerate their market expansion, while making payment installments based on monthly revenues.
Larger competitors often have existing funding to quickly scale investment in new ventures and this places them at an advantage over smaller businesses and challengers. So, RBF gives smaller businesses the opportunity to pursue expansion efforts at a sustainable rate.
Will digitalisation level the playing field?
Currently, international trade is weighted towards the large incumbents. Small businesses have to contend with late supplier payments, fluctuating geo-political climates that can affect product availability, and traditional lenders that are slow or reluctant to provide access to capital. Larger organisations often have the cashflow, resources and relationships that gives them the head start. It’s an unfair and challenging dynamic that stifles competition and market growth.
But fortunately, this is beginning to change. Trust in alternative financiers is soaring as small businesses are rightly no longer settling for less. These lenders fundamentally understand the finance pain-points as they have experienced the journey themselves. They get that the processes of traditional banks are out of date and no longer suit modern ambitions to scale. That’s why options like invoice financing or RBF are often digitally led and easily accessible, levelling the playing field for small businesses and unlocking the runway to growth.
