It is tough to figure out how much working capital a SME will need in future. There are too many assumptions. Alternative financing offers a simple and flexible solution to this problem by being transaction and asset based. True success will still depend on HOW the SME owner spends the cash.
Many business failures are caused by declining sales but just as many fail due to a rapid increase. Alternative financing works best in that rapid growth scenario by creating new working capital quickly and preventing ongoing cash flow problems. The services provided can also be as valuable as the cash.
Ideally SME owners will make the best spending decisions even when it looks to them like there is lots of cash in the bank. Taking advantage of discounts should be their goal but never at the expense of priority payables and taxes. Business owners can spend profit where they like but it’s also the best source of new working capital.
SME owners who enjoy generous gross margins are the best candidates for alternative financing. The ability to earn a gross margin ten or twelve times per year vs three or four far outweighs the cost. The key to long term success is by building the cost of capital into the pricing equation
High seasonality is another challenge that alternative financing can handle. Flexibility is key and so is the ability to move quickly. For turnarounds it’s the perfect interim financing source that offers the best chance of success.
The greatest risk to an alternative lender is poor workmanship, faulty products or mistakes so they still have to pick their clients carefully. When they do it creates the perfect “non-equity partnership” and the best possible chance of success for a SME in a world of uncertainty.