Access to finance for small businesses

Recently a lot of companies have reached out to me or to my acquaintances asking for cashflow, asking for funding, and wondering how can they maintain their equity while getting some debt, or cashflow of some sort.

I will keep this post simple, sharing the high level concepts.

The challenge arise for the business mostly in two cases:

1- When the business is burning more than they earn to maintain a certain rate of growth.

2- When the business is healthy profit wise, but the receivables are late, therefor the cashflow is impacted.

Let's go back for a minute, and look into how the financing companies, or funds look at financing small businesses, and what's their process:

financing companies:

Risk-averse, they don't look at business that have annual (sales) GMV lower than 4 million SAR mostly, they demand profitability, they like doing site visits, they LOVE point of sale (POS) financing, and they're going to work with sectors they understand, and sectors that have no risk. (if you have a POS, I highly recommend checking out that option of financing)

Financing companies also try to keep the financing amounts very high, they try to make the minimum around 200,000 SAR or more.

You're for sure going to pay admin fees as well, keep that in mind. And maybe have some sort of guarantees.

Banks:

If you're reading this article, it means you know the challenges of getting financing from banks.

Banks try to focus on corporate financing, and POS financing.

one of the major reason banks don't do working capital and term loans for small businesses is the cost of processing an application, I heard from a CEO of a financing company that the average cost per application is 5000 $, that's why they try to focus on the big tickets.

Funds and investment companies:

In order to be fit for this criteria, you have to be fast growing, and the risks are way higher, since you have to spend a lot to grow fast ( in most cases ) which means cash flow negative on monthly basis.

Let alone the challenges that come from having a new partner on-board, the control of the company, the decisions, and all that comes with selling equity of your company.

It can be a good option for you if you're growing very fast, and would like to be backed by venture funds that appreciate good founders, and stellar growth.

Angel investors:

Having new partners can be challenge, even If they're angels, but it's one of the best options taking in consideration that all the other options are very tough on the business and the founder.

Angels usually come in with some experience that they can share with the company, and some sort of support that can be appreciated.

Private equity firms:

Private equity firms seek mostly low risk businesses, and businesses that have annual sales way higher than 5 million SAR.

And some other challenges like the way they conduct the due diligence, and the way the want to control their board seats in a way that's not reasonable for a small business.

Social banks/Support programs:

Support programs are mostly executed via financing companies, which means you have to be fit for the criteria of the financing companies.

They demand huge business plans, feasibility studies, strong commitments, and a clear path to profitability within the first year or two. Also, the biggest challenge is the way they look into favorable sectors and certain types of businesses.

There are some new initiatives SAMA and MCIT (NTDP) are working on, hopefully they can be of amazing value to the business, and accessible for all.

Crowd funding platforms:

Crowd funding platforms in KSA focus on three products:

1- Invoice or PO financing: debt financing that focuses on the early settlement of a receivable invoice at a discounted value ( invoice factoring, or PO early settlement )

2- POS financing: Debt financing for brick and mortar businesses that are using a point of sale in their branches, the Point of sale is used to measure the Business's health, and the frequency of the transaction.

The way it works is that after the loan is disbursed to the merchant, the collection will happen through the transactions itself before it reaches the merchant's bank account.

3- Equity financing: The merchant/business will get new partners/investors on-board as part of a crowdfunding round that is publicized and the masses can invest and be owners, this can be costly on the business and can take more time of the founder to manage the investors' questions and enquiries, and the data will be public as well.

The difference between cash flow and access to finance:

Maybe we can dive deep into this in the next post or blog post.

Thanks for reading.

Saleh Al-Ghamdi

[email protected]