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Diversify or die: Why SMEs should diversify their funding sources

Paul Surtees Oct 02, 2017

Perhaps most important of these is the volume and length of funding required. But one point often gets overlooked: diversification.

Diversification of funding is more important now than it’s ever been. In uncertain economic times, banks are increasingly frugal with overdraft facilities and more traditional forms of funding, such as term loans, are becoming tougher to negotiate. As a result, funding should be sought from a wide range of sources.

The financial crisis of 2008 – and the stagnant conditions that followed – meant that high street banks raised the barriers to entry for SMEs seeking funding. Fortunately, other sources of funding emerged from the ashes of the crisis as financial innovation and technology offered a new range of options to business owners.

Despite this breadth of choice, which now includes peer-to-peer, crowdfunding, invoice financing to name a few, the majority of SMEs remain unaware of the options available to them, with business owners failing to shop around for finance. Instead, they continue to go directly to their bank to apply for an overdraft or loan, often on unattractive terms.

Whilst the chaos of the last decade led to more finance options, seeking diversity in funding is equally important in stable market conditions. In fact, you should be diversifying your approach to business financing during times of prosperity. The OECD has highlighted why SMEs should future proof their businesses against instability and crisis.

But SMEs are failing to heed this warning, with just one in nine actively implementing this measure by diversifying the funding of their businesses. That’s a real concern.

The choice not to diversify is a strange one, since there has never been more choice available to SMEs wanting to raise finance. It seems that in stable times, complacency can set in, and many businesses rely on a low number of traditional forms of finance because they don’t foresee a situation where a lack of options can hurt them.

But this is wrong. As business owners, we should always be preparing for the next downturn which is, inevitably, never far ahead. One way in which SMEs can prepare for uncertain times is to employ a wide range of financing options, so that when markets turn against them, and hard times come, they are fully prepared for tougher credit conditions.

If an SME needs to borrow, they can protect themselves in a number of ways.

  • Firstly, there is always a need for short-term cover, and the easiest solution here is the old fashioned overdraft, still available from your high street bank.
  • Over the medium-term, a business can always look to asset or invoice financing to protect them from the downside of falling short of cash, and many low cost online platforms now offer this service.
  • Over the long term, larger SMEs can employ term or peer-to-peer loans that can help them with their business aims.

Breaking your business’ prospects into the short, medium and long term will help you work out how best to structure your company’s finances. Most importantly, diversification of funding type and source is crucial to the sustainability of your business.

We’re not expecting another 2008-style crisis anytime soon in the UK. But, with so many uncertainties swirling in the ether at present, it pays to be prepared. Benjamin Disraeli famously said, "I am prepared for the worst, but hope for the best." Business financing should be no different.

Of course, bank financing will continue to be a crucial provider of capital for the SME sector. But a breadth of options will help support your long-term prospects and reduce the vulnerability of the wider SME sector to changes in the credit market.

 

How can Capitalise help?

Capitalise identifies the best financing options available for your business. We've partnered with 80+ institutional lenders throughout the UK to offer business loans to companies like yours. It's a quick, free and easy way to get the funding that best matches your needs. In both certain and less certain times, we can help you successfully navigate credit markets and obtain the finance you need to grow your business.

If you’d like to discuss any aspect of funding, please get in touch with us. To find out more, visit our website here.

 

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