Do You Have a Small Business Finance Borrowing Strategy?

Since the GFC, there have been countless articles written about the difficulties SME’s face in securing adequate funding to meet current cash flow requirements, as well as, any plans for growth. Most of the conversation has been on the lender side of the equation suggesting the problem needs to be solved at that end. Now I don’t disagree with that view, however for the purpose of this article, I am going to focus on what the SME Borrowers can change, to make getting finance achievable.

The answer to the problem sounds simple: Develop a clear long term strategy followed by a detailed medium term plan. Is this easy enough?  Too often, businesses wait until there is a problem with cash flow or an opportunity to expand that requires additional capital, before they explore how and where to get additional financing. This is a bit like waiting until it rains to buy an umbrella. Chances are, you are not going to get the best deal, or even worse you may get wet!

Developing a borrowing strategy is the first step. It should mirror the business strategy -- although, this is different for every borrower. The main purpose of the strategy is to ensure that your business can be funded in the medium to long term; at the same time, match the requirements to the right funding facilities. For example if you start using the overdraft for capital expenditure, you may quickly end up with cash flow problems. The strategy should firstly identify all available funding options to the business in question. For example:

1.    Personnel Asset Equity based loans (loans secured against directors property or assets)
2.    Business Asset Equity based loans (loans secured against the business property or assets)
3.    Business equity loans ( overdrafts  or loan facility secured by a general charge over the business)
4.    Lease or Rental ( secured over a specific asset of the business)
5.    Debtor \ Invoice Finance ( secured against receivable  invoices of the business)
6.    Trade Finance ( supplied by terms provided by the suppliers to the business)
7.    Insurance premium Funding
8.    Purchase Order Funding ( secured against future orders received)
9.    Inventory Funding ( Secured against inventory on hand)
10.  Credit Cards
11.  Equity Raising ( selling shares in the business to third party investors)
12.  Crowd Funding ( still in its infancy and may not be a reliable option)

Another often under estimated element in the overall strategy is the structure and preparation of accounting information. Having a clear transparent detailed set of accounts, balance sheet and cash flow projections which present the business in a manner that gives funders the ability to understand the true financial situation at any given point in time is priceless. Of course, everyone wants to structure and prepare the accounts to maximize tax or other benefits. However, this could come at a cost of being able to get finance easily and at the best price. How to proceed needs to be weighed up in your overall strategy. I suggest you discuss what structure is best for your business with a qualified accountant.

Without a doubt the most important key to getting your finance strategy right is having a thorough business plan with cash flow projections. This will provide the best insight as to what type of finance is needed and when. One thing to remember is the temptation to use up the cheapest available funds first (such as secured bank loan) on all purchases which can be of help in short term. However, this may not be the best long term strategy.

A good strategy should have the right funding option in place, matched against the corresponding need at the right time. Business should also allow for a buffer in funding facilities to cover unexpected downturns or sudden positive spikes in revenue which can put pressure on cash flow.


Tom Radovanic

Sales Director at SMECASH


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Stephen Hall

Stephen Hall , Business Educator and Coach at ActionCOACH

Tom, great article. I couldn't agree with you more about the importance of having a thorough business plan and all too often people don't think about their financing needs in advance, let alone plan for them! I've certainly been encouraged to discuss it more with the small businesses I'm working with in their planning stages. Thanks for the contribution.

Ling Lee

Ling Lee , at Digital Marketing and Personal Branding

Thanks for sharing this :D I must admit I'm very guilty of building my business haphazardly.