Getting funding from traditional sources has always been challenging for SMEs. It’s particularly difficult in the current environment. The pace at which venture capitalists are deploying funds is rapidly contracting while traditional lenders’ interest rates are rising. Approval rates are slow and low.
It’s no wonder that Australia’s SMEs are growing dissatisfied with traditional banks. Recent research from RFI Global found that 40 per cent of Australian SMEs plan to take up non-traditional borrowing products in 2022. Fortunately, there are now a range of alternative funding options on offer, from crowdsourcing and peer-to-peer lending to micro loans, vendor financing and revenue-based funding.
But is alternative funding the right option for your business? And how do you know if it’s time to seek funding? These are six signs it’s probably time to consider seeking alternative funding.
1. Traditional banks don’t understand eCommerce
Many big banks just don’t understand eCommerce. This doesn’t help the many SMEs who have pivoted to omnichannel or even fully online businesses over the past couple of years. PhycoHealth produces food supplements and beauty products from its Australian seaweed farm. Originally reliant on email marketing and returning customers, it needed funds to take the business to the next level and help it scale overseas. But its founder struggled to get finance as traditional banks were too conservative, and couldn’t understand how eCommerce evolves. Instead, it is using revenue-based finance which has also given it access to a network of partners.
2. You lack credit history
Many founders struggle with securing funding from banks and other traditional channels because their credit is poor, or they lack credit history. Even Clearco faced this challenge in its early days, one investment banker told our founder, “Ma’am you don’t understand credit. You’re giving small businesses capital with no personal guarantees.” Unlike banks that focus on credit or VC firms that depend on a single pitch, many alternative lenders look at the whole picture.
3. You’ve built a loyal community
If you’ve been successful in building a loyal community of customers, you may find that they help accelerate your growth by becoming vocal brand ambassadors. Melbourne-based iPantry was founded in April 2020 in response to people’s need for next-day delivery during the pandemic. The business was founded with private debt funding and began to grow rapidly. It needed to invest more in marketing but the founders didn’t want to dilute their stake. Revenue-based funding enabled iPantry to invest in marketing and technology and expand into new states. It can also access top-up funding as revenue grows.
4. You’re seeing rising demand
If demand is rising strongly, the business may be ready to scale to the next level. Cocktail mixer startup Mr Consistent was starting to see major traction for its first-to-market pre-mixed cocktail product. But while the business achieved a line of credit to fund most of its production facility, no bank was willing to talk to them about growth. The founders were also reluctant to give up equity at such an early stage of the business. Instead they turned to revenue-based funding to pay for performance marketing and also fund direct-from-supplier accessories such as cocktail shakers.
5. You’re turning down opportunities for growth
Missed opportunities are especially painful when they are preventable. Founders often find themselves in a situation in which they have to choose between funding operations or look towards growth. In this situation, additional funding makes sense. Otherwise opportunities that come your way may go to a competitor. Fashion brand Apéro Label saw a big increase in online sales due to the pandemic, but at the same time supply chain costs were increasing. It needed to invest in sales and marketing to seize the opportunity and continue to scale, but capital was tied up in inventory. By using revenue-based financing, it could free up cash to invest in marketing.
6. You struggle with seasonal volatility
Many businesses experience busy times and quieter times, typically on a seasonal basis. Original Ugg Boots Australia, which manufactures sheepskin goods (including the iconic Ugg), has a downtime in the summer months. This makes it an ideal time to ramp up manufacturing but the sales pipeline makes it harder to support it. With a revenue-based model the repayments are lower during quieter times and Original Ugg Boot Australia can buy the materials it needs and fulfill orders much more quickly.
It’s important to take into account the finance partners reputation when considering your options. Transparency around fees and interest rates is critical. The funding should enable you to grow your business, not drown you in debt.
Clearco leverages AI and predictive analytics to strip out the bias that affects many traditional forms of funding and evaluates a business’s potential for success above everything else.
To learn more about Clearco revenue-based finance please visit <https://clear.co/en-au/?utm_source=pr&utm_medium=email&utm_campaign=core-pr-au-2022-paidmedia-insideretail-july-12tharticle>
By Dan Peters, Managing Director at Clearco Australia
