With so many young businesses entering the market and growing in New Zealand, they face many challenges when considering financing options. We have found that small businesses tend to look at funding from a tactical, as opposed to strategic, perspective. The problem with this approach is that it addresses the symptom of their pain point, but not the cause.Similar to putting a bandaid over a wound, it will only stop the bleeding temporarily. During growth stages, entrepreneurs need to consider what other value the financier could provide aside from traditional business funding. A holistic approach can instead be taken to maximise the businesses strategy, ultimately working towards achieving the goals of the business.
Before seeking funding, it is important to realise the distinct differences between being tactical and being strategic. Tactical funding tends to focus on the ‘now’; the finances being generally repaid over 36 months or less, with the purpose of meeting short-term financial commitments. It can be used to fix an immediate funding requirement such as cash flow issues, staff or inventory management or to purchase new assets. This sort of finance is common among SMEs as cash flow becomes an increasing difficult problem to deal with due to late payments and slow processes. This type of funding is also commonly used as growth capital: to seize business opportunities and to help with business development.
When financing tactically, there will be a range of considerations when choosing the best option for your business. It is key to consider factors such as:
- Interest rates
- Repayment frequency
- Loan term
- Extra or hidden fees (such as early repayment fees), if any
- Security required for the loan, if any
- Flexibility in payments
- Flexibility in use of the funds, and
- Ensuring that when combined, these are the best terms for your business.
For tactical funding, the main focus should be on finding terms such as the above, that bet suit your business. This may mean looking beyond traditional finance institutions such as banks, and considering other alternative lenders that can uniquely meet the needs of your business and usually offer better terms. For example, alternative lenders can often offer unsecured business loans, meaning your personal assets aren’t put at risk.
Strategic funding tends to focus on the long-term, being used from anywhere between 1-5 years. The key consideration for strategic funding is to go beyond what is being offered. Small businesses can leverage competencies and knowledge the funder may be able to supply. Funders will pursue a range of activities to help your business find profitability and growth, including leveraging experience and relationships in industries that may ultimately help your business achieve its strategic goals. For example, Rabobank has a specialist sector that works specifically with agricultural clients. By sectioning off a part of their business exclusively for agricultural finance, they are able to uniquely meet the needs of farmers, provide terms that are suitable to the industry and find payment terms that are well-matched for farmers’ seasonal cash flow.
When sourcing strategic funding, SME owners should also look at funders’ ability to provide business, management and financial advice. Certain institutions may allow you to save on cost, reduce tax and minimise unproductive spending. Some strategic finance providers will be able to consult small businesses and assist in their spending to free up capital. If a broker is able to provide you with this additional advice when seeking funding, it is an indicator that they can continue to provide knowledgeable and practical advice for your business to profit as a result.
As your business grows and strategy plays out, ongoing financial support is needed to focus on key areas to that may need funding. Some brokers may not have the finance or infrastructure to support the growth demands of your business. For businesses with high growth rates, it is imperative that the broker has the ability to supply the necessary finance that your business needs to keep up with its rate of development. Some smaller brokers may offer favourable terms, but when seeking large amounts of funding, you don’t want to switch between various brokers to find the funding right for your situation at the time. Choose a strategic financier that has the ability to support your growth needs.
The key for strategic funders is to add value to their funding, not just offer money. It should be viewed as a strategic partnership, not just one-way transaction. Funders can come in a variety of forms including Angel Investors, Venture Capitalists, and private equity firms – all which provide different terms and platforms for business to grow. Businesses should consider what is the most suitable option for them and explore a variety of opportunities before making a decision on their funding needs.
Like many dealings with banks, it takes time for traditional institutions to understand your business and to build suitable financial solutions for the right purpose. A more strategic approach to whom you should be building those banking relationships with could save you money, time and generate more opportunities in the long term. Alternative lenders such as Spotcap are used every day by businesses to create a strategic funding partnership, providing tactical funding to execute specific tactical strategies for businesses. It is partnerships such as these that allow businesses to get ahead of their competitors and find unique competitive advantages.
If you would like to chat about tactical funding options, feel free to either contact me directly or head to spotcap.co.nz about creating a relationship that benefits your funding needs.
Partnership Manager, Spotcap New Zealand
Originally published July 25 2017 , updated July 25 2017