External finance has a crucial role in the longevity, growth and ongoing performance of a business. Having access to appropriate finance at the relevant time enables you to overcome a broad spectrum of issues in the lifespan of your company which facilitate long-term success.
Despite the significance of external funding, many SMEs still choose not to use it. Seven in 10 SMEs state they would forgo growth if it means having to use finance.
The truth is that financial support is integral for any SME that wants to achieve its goals. The fact that so many businesses continue to actively avoid it suggests a lack of understanding of its power or a misconception of the effects.
We have listed the common funding fears you may face before seeking support for your business – and why they shouldn’t hold you back.
Fear of debt
Using external finance is often associated with placing your business into debt. Some owners fear the effect this has on their financial stability, especially if they fall deeper into debt and end up having to face repossession or bankruptcy.
68% of SMEs already in debt state their aim to pay it off and remain debt-free. However, debt isn’t always a bad thing if you manage it correctly.
While it is true that some types of funding – such as loans – will leave you indebted to the lender, this is only temporary. Most forms will come with an agreed payment plan which allows you to repay the owed balance at fixed regular instalments.
It’s also possible to find different options that suit your affordability criteria, making your debt manageable and clearable. You won’t be at any detriment, provided you pay it back in the agreed timeframe.
Debt solutions have the power to fuel growth and ease cash flow when used appropriately. While you might have the short-term pain of debt repayments, it can unlock long-term benefits for your business, so it is a viable option.
Lack of understanding
Another common reason for funding fear is simply not understanding the scope of support available in the market today and the impact it can have.
Business finance is typically associated with bank loans or investment. However, many forms of funding fall between the two categories, enabling every SME to find a solution that is tailored to their needs. Alternative finance is also growing in popularity, offering fast, flexible and innovative options.
It is also crucial to educate SMEs about the benefits associated with external finance, including long-term growth, optimisation, improved cash flow and resilience.
With more knowledge of how external finance works, the specific options available and their power to strengthen a business, more companies should be open to funding and overcome any negative associations they may have.
Rejection
External finance requires time and effort, either by applying to lenders or attracting investors to your business. Not everyone will be successful, especially as some funding types have strict criteria to meet. It’s natural to worry about rejection.
The issue is exacerbated by inequality in the financial market. There are still problems with regional disparities in funding, while SMEs led by minority groups are less likely to receive financing.
While work needs to be done (and is already being done) to improve access to finance for a wider variety of businesses, many SMEs still succeed now. The key is finding a suitable funding option that matches your eligibility level and fulfils your needs.
With the rise of alternative finance, more options are available than ever. Even if you are rejected at first, there are other solutions to fall back on until you find a perfect fit.
It’s also essential to understand how to optimise your application to stand a better chance of success. A commercial broker helps you improve your likelihood of acceptance.
Assuming finance is only for businesses in trouble
Another misconception about external funding is that it is only for failing companies. Many entrepreneurs endeavour to manage finance internally, relying only on their reserves or personal savings. Having to seek support externally can be viewed negatively.
However, the reality is that if companies were to rely on their income solely, few would be able to grow. Extensive investment is often required to maximise results, which many businesses will not be able to afford. External finance makes it accessible.
While funding can be a crucial tool for struggling SMEs, many forms are designed for those looking to grow and reach the next level. A lot of lenders will only consider businesses that have proven performance.
In short, external finance is available to everyone – and embracing it should not be considered a sign of failure.
Lack of confidentiality
Given the myth that external finance indicates instability, some businesses will be unwilling to disclose their use of it to their customers. There will be a fear it could concern customers, suppliers and other stakeholders, potentially undermining the company’s position.
Fortunately, it is possible to utilise finance with full confidentiality. Most lenders will work with you without the need to disclose it.
Examples include invoice discounting, which allows you to unlock funding in your unpaid invoices without ever disclosing to your customers that you are working with a lender.
If this is a requirement, it’s critical to shop around to find a solution that allows you to retain privacy. This might include reading the small print or searching for investors willing to take a back seat. Essentially, you need to find an option that you’re comfortable with.
Reluctance to give up equity
Businesses often raise funding through investment, in which you give shares in your company in exchange for substantial sums of money.
Giving up equity in a company is a deterrent for many owners. Shareholders gain specific entitlements which you need to abide by.
When you offer equity in your business, you invite external people to have a say and influence your decisions. This could cause you to lose some control and an expectation of dividends from your profits.
However, this does not consider the benefits of investment, which include valuable guidance that facilitates growth, keeps your business on track, and provides funding to achieve your goals. These makes losing equity much more worthwhile.
You also do not have to use equity funding if you don’t wish to – other financial solutions don’t involve equity and may be more suitable.
Not finding the right solution
For businesses with negative experiences of external finance, it usually comes down to not finding a good fit for your needs.
Most of the funding fears listed already can be solved by identifying a suitable solution. You need an option that fulfils the requirements and goals of your business. You also need to ensure it meets your eligibility criteria, including affordability and other preferences.
By finding an option that works for you, you will decrease the chances of rejection and falling behind on repayments while improving the likelihood of long-term success. This will enable you to experience the rewards, including growth, resilience and high performance.
The good news is commercial finance market is constantly evolving, bringing solutions that match a wider range of needs and giving more people choice.
Conclusion
External finance has a crucial role in business, especially those who want to overcome obstacles and achieve long-term growth.
If you don’t typically utilise funding or are new to it, it’s easy to be put off by misconceptions and fears. However, it’s vital to understand the rewards that can be unleashed with the proper support. It’s also important to remember that financial help does not need to leave you in a bad position, provided you find an option that works and manage it effectively.
By doing so, you ensure your SME emerges stronger with your goals achieved.
External funding can be the difference between the success and failure of your business. Get in touch with us today to learn more about how we can support you with the right financial solutions.