Australia relies upon its small businesses, and these small businesses rely upon capital if they are to grow and survive. In many cases, business owners already have a clearly defined plan for growth, but there is one problem — the capital they need is not available.

This is where government bodies, financial services firms, brokers, business mentors, and the accounting sector, all have a part to play. It is these entities that help business owners better understand their options for financing.

For many small and medium-sized businesses, it is the timing mismatch between inflow and outflow which causes cashflow problems. With this impediment in the way, how can a business also hope to fund growth? What many business owners do not understand is that growth must be linked with the source of capital, and, instead, they focus primarily on their revenue targets. To grow, a business must win new contracts, hire new staff, purchase more inventory, or pay deposits to the manufacturers of their goods, and all of this rapidly absorbs cash.

So what is the alternative? One route is to generate cash internally, but how can this cash source be unlocked? Many business owners cannot even visualise the sources of cash within their organisation — for example, in the inventory already sitting on the warehouse floor, or the longer term contracts currently being worked on. How can they be expected to implement the strategies needed to extract this cash? The answer lies in finding a good and reliable accountancy team.

How SMEs currently fund their growth

Let’s consider, as an example, a rapidly growing company that has been successfully operating for more than four years, generating $2M+ of turnover. This company has historically funded itself in the following ways;

  1. A combination of operating cash flow and any profits left in the business, is also known as retained earnings.
  2. Personal funding from owners, their family money or equity from outside investment.

These funding sources might seem like two fairly solid revenue channels, but there is a problem — the business is not generating enough capital to grow and has had to miss out on key sales as a result. The funding methods this business are using are simply inadequate.

Of course, this is just a single example, but it rings true for many. Research shows that 67% of small business owners who are focused on long term growth will use business profits as their primary means of funding, while 19% rely primarily on personal savings. Only 8% will opt to use a business loan to fund their growth.

Use controlled borrowing and short-term working capital

On the surface, this appears to be a wise choice. Borrowing small business growth capital is commonly viewed as a risky strategy, after all. However, this approach could be stifling businesses.

By using controlled borrowing alongside short-term working capital, companies are, in fact, able to accelerate the velocity and quantity of their supply chain, and so take advantage of the market demand. Increased speed to market, combined with a higher quantity of readily available inventory, translates to increased revenue.

Banks, too, and alternative lenders, such as Banjo Loans, can be sources of capital.

Examples of how capital can help growing businesses

The business in this example – an online retailer — believes they require a ‘touch and feel’ component to assist sales, and have the opportunity to place stock into European, Canadian, and US markets in time for the northern hemisphere’s summer. To cover manufacturing costs, the company used internally generated funds to pay for a 50% deposit with a Chinese manufacturer, but the goods will only be delivered when the final $250K is paid.

While the company waits for further capital to be unlocked within their business, they risk missing out on this lucrative summer market, which could cost them $1.0M in sales. Borrowing the $250K would secure this projected $1.0M, with the same operating cost base for the company, with increased profitability.

In another example, Banjo Loans formed a relationship with a domestic manufacturer of niche transportation vehicles. The manufacturer’s turnover was then $1.5M, but market demand was far in excess of the company’s capacity to fund the increase in raw stock, as well as manufacturing lead times, finished goods, and credit terms for buyers.

A 30% deposit to manufacturers in China was covered using working capital, as was the purchase of raw materials upfront. Banjo Loans assisted with a short term working capital facility, enabling the company to accelerate its products’ journey to market. Their growth in revenue is projected to exceed $7.5M in 2019.

The impact alternative lenders are making in overseas markets

Both of the above examples highlight the ‘butterfly effect’ within the Australian economy, in which access to funding directly increases turnover, revenue, and profitability. This was highlighted in the Fintech in Australia study, conducted by Frost and Sullivan in 2015, which forecasted how the Australian fintech sector would grow at a CAGR of 76% by 2020 and add $1B of new value to the Australian economy.

But what does this mean on a global scale? When looking at the bigger picture, we can see that 90% of businesses worldwide are classed as SMEs, contributing 60% of overall employment and 50% of gross added value.

report from the United States, released in May 2018, found a huge upsurge in the amount online small business lenders are providing to SMEs, as well as a huge resulting economic impact. Between 2015 and 2017, small business lenders such as OnDeck, Kabbage, and Lendio;

  • Facilitated $10 billion in online loans.
  • Generated $37.7 billion in gross output.
  • Created 358,911 jobs and $12.6 billion in wages in U.S. communities.
  • Are filling a critical financing gap for small business owners across industries.

We can see these same results in other key global markets, such as in the UK.

The data also shows just how big of an impact these lenders have for businesses in local communities across the world. For every $1 lent to an SME, as much as $3.79 of gross output is achieved in the community on average. 

There are still challenges to be faced in Australia, but the future looks bright. The rise of fintech and alternative lenders looks set to connect more businesses than ever before to the growth capital they sorely need. And this is, without a doubt, great news for our society as a whole.