SMEs during a recession. 

While the current landscape is challenging for all businesses, it is crucial to remember that crises can drive innovation and create new opportunities. Recessions have led to the growth of the most well-known companies on the planet: Disney was started alongside The Great Depression, Microsoft began during an economic downturn, and FedEx was launched during a recession too. 

The crucial element for any growing company is to quickly and easily obtain the finance to grow. Unfortunately for many business owners, banks are becoming less of an option for raising capital, as the past decade has changed how traditional banks deal with SMEs. Since most small businesses do not require vast amounts of capital, they are lower down the priority list for many banks, who cannot readily process such loans, are constrained by regulation and don’t see the smaller fries worth their time. 

However, this has paved the way for the emergence of genuinely game-changing alternative finance providers, which are helping business owners grow faster than ever. These include revenue-based finance companies, merchant cash advance providers, and invoice finance leaders – all of which are more accessible than traditional banks, with seamless user experiences. Each of them has its unique benefits and use cases. 

Revenue-based finance providers are when lenders finance companies for a percentage of their future revenue. If a company applied for a £10,000 loan, they might agree to pay back 5% of their monthly revenue until the loan is repaid, plus a monthly fee. This option does not require founders to offer collateral, nor do they need to provide equity in their business. 

If the market changes or sales decrease, repayments will also slow too, which is favourable for businesses affected by factors beyond their control. Revenue-based finance is an ideal avenue for new but growing companies searching for quick access to cash without giving away equity or spending time raising capital – such as eCommerce providers with a solid local audience who want to expand to another territory. 

Another financing option for SMEs during a recession is merchant cash advance providers – similar in that they provide cash in exchange for a percentage of future sales. This type of finance is often used for physical brick-and-mortar businesses like restaurants, hospitality or retail businesses that see fluctuations. 

The amount you can borrow typically depends on the credit rating, sales projections, and business size. Businesses repay according to a factor rate, a multiplier that depends on the business’s credit score. Generally, this form of finance is used for the short term and is flexible, and can be helpful for refurbishment or purchasing inventory – for example, when a restaurant wants to take advantage of a quiet period to expand its premises. 

Lastly, invoice financing is a powerful option for SMEs whether there is a recession or not. In boom times, companies need to raise capital quickly to accelerate business growth; in recessions, invoice finance can be a critical pillar of supporting cash flow and shielding a business against bad debts. However, recently, invoice finance has been a lifeline for those companies increasing exports to countries outside the EU post-Brexit. 

In fact, over the past couple of years, 87 per cent of small business owners in the UK have reported losing money. The UK invoice finance sector has played an essential role in helping businesses to recover, with research revealing that 27 per cent of companies (with a turnover of between £1M and £500M) use invoice financing. 

Invoice financing works through the lender using an unpaid invoice as security for funding. Invoice finance providers quickly provide access to a percentage of an unpaid invoice’s value, which can be especially useful for SMEs with large corporate clients whose payment terms can range from 90 to 120 days. 

Finance providers gauge which invoices to fund by using a client portal that allows businesses to upload and select invoices for funding – once approved, payment is advanced to the company, usually within 24 hours. This speed is crucial as the faster the business can obtain that revenue, the quicker it can be reinvested. 

This reinvestment could be in a new marketing campaign, part-time staff, or software that can drastically improve operations. It can be particularly helpful when an established business is looking to experiment with a brand-new area of business – for example, when a fashion retailer is looking to launch a new type of product. 

Recession or not, while it is well-known that half of new businesses do not survive the first five years of their business – the ones that do survive have strong cash flow, strong marketing and product-market fit, and high-performing teams. 

No matter how a business raises capital, what matters most is that it can do so quickly and easily. This new variety of options means that strong, resilient companies will not be knocked down by the winds of recession but instead will use the challenging environment as an opportunity to batten down the hatches and access new means of growth. 

Ian Duffy

Ian Duffy, CEO, Accelerated Payments.

Rise of the machines.

Ahsan Zafeer • 26th November 2022

Ahsan Zafeer covers topics related to tech and digital marketing and tweets @AhsanZafeer. Here he explains people’s fears as to why machines are taking over their jobs.