Our experience have become over the years that almost all entrepreneurs and corporates have some approach to financing, basically between two extremes: to consider external financing somewhat a shame, a kind of a sign of non-performance or lack of stability, or to unreasonably overstretch it and incorporate additional risk into the business, just because it is available and achievable in the very moment.
Not surprisingly, the realistic approach may be somewhere in between, in line with the overall characteristics of the macro environment, the industry, the given business and the actual stage of the individual market participant. Among others. Nevertheless, when meeting otherwise smart, innovative, motivated business people, with a reasonable approach, we still get the impression of something missing from their thinking, which may prevent them from having a competitive and successful strategy.
When meeting entrepreneurs, the issue of external financing is rather a yes-no (to have or not to have) question, and the ‘how much’, ‘what type’ and ‘at what cost’ does not even appear in the conversations. When we engage for a strategic development project and it comes to financing, we mostly face an already scaled-back expectation, according to the actually available financial resources. When we raise the issue of the possible additional external solutions and their related costs, the reactions are somewhere between massive reluctance and skeptic curiosity. Why? We try to give some highlights below.
Lack of proper knowledge of financial products and services. It may not be an exaggeration that almost all entrepreneurs have some knowledge on the financing possibilities, but very few have a proper, or at least a sufficient level of it. Of course, they are not necessarily expected to be experts, but the partial knowledge may keep them away from otherwise attractive business opportunities. Unfortunately, when seeking a financing solution, the very first reaction is still to turn to their bank (more specifically to their account bank), who is – not surprisingly – more interested in selling its own products and services than understanding and facilitating the business ideas of individual clients. The smaller the client in size, the more valid this statement becomes.
We do not mean to state here that banks, in general, are reluctant, negligent or anything similar, but that even the purposed, intentionally SME focused products and services are somehow so standardised, simply due to efficiency reasons, which may result in being uncomfortable for all the enterprises (although for different reasons). Not to mention the pricing and other conditions, which are associated with the perceived risk, and which may completely put such – otherwise positive – initiations out of context.
Lack of proper knowledge about the own business. Probably this is the point where most entrepreneurs give up and say that who, if not me, knows my business the best? The emphasis is on the word ‘proper’, of course. Proper in the sense not only to know the nature, basic characteristics, but also the wider context and perspectives, which may be necessary for making a decision on financing. This may be one of the reasons why the owners of weakly capitalized enterprises are still desperately thinking about increasing credit lines, and those with extremely high liquidity ratios suffer from the limitations set by their equity investor – unnecessarily. Despite of the perception that everything works, also some growth is experienced, the continuous discomfort, even disappointment, is still there.
Negative experience in the past. It is almost directly related to the lack of proper knowledge (both regarding the financial products and services and the own business). Routine drives entrepreneurs to their bank, where the complicated, over or under-explained products and services may be misleading, and building an expectation in them which may not match the hard facts. Such as they may see their own business facts and perspectives in a way which may be far from reality, as was explained above.
Disappointment is almost inevitable, but what is even worse is that it tends to change the general attitude towards external financing. The priority becomes to avoid certain consequences instead of seeking better matching solutions. How simple it could be to seek for capital solutions for the weakly capitalized ones, and debt-financing for those, whose overall cash position is strong..
Concerns about the ambiguities of the future. The further ahead we look, the more ambiguity we may find. Deciding on external financing may be perceived as to add to the already existing high level of ambiguity. Although, it is hard to argue with such a general statement, entrepreneurs have to realize, that their market presence and activity may also affect that future. They are not only passive subjects, and surely not ‘victims’ of it. Consequently, the task is not to improve on fortune-telling skills, but to consciously build, maintain and develop their businesses, to shape that future to the extent possible. Meaning also to strengthen their footprint, no matter how small it is, if that is a meaningful, reasonable and well-established one.
General anxiety is not a constructive feeling and may keep entrepreneurs off from actions of any kind. Fear is a much better one, as means a targeted, well-pointed outcome to be avoided. Once these avoidable negative events are identified, the task becomes to find the ways of minimizing the risk of their occurrence, such as the overall volume of their impact. With other words: a proper strategy and the following careful planning would give the opportunity to make the necessary adjustments, when necessary, to adapt to the changing environment, and to chose from the suitable risk mitigation techniques.
Changing demand. Besides all the aforementioned possible reasons, there is one additional remarkable reason. We have decided to highlight it as a kind of a closing remark, like saving the best for last: the fast changing demand. The world is changing in general, due to the scientific and technological developments, which results in considerable changes in the customer behaviour, as well. So is the case on the financial services market. Not only in terms of the content of products and services, but also the conditions within and the means by which they are expected by the clients – the entrepreneurs.
Currently, we experience that the easy availability tends to overwrite rationale regarding the other terms (e.g. price, early repayment, termination, etc.), such as the structure (e.g. capital, instead of loan). In our understanding, we are jumping from one extreme to the other, instead of finding a bridge between the service providers and the customers and a transition between product or service types. Provided that we are very much at the beginning of the growing popularity of the alternative solutions, we see only minor, isolated-looking problems so far. Which might not be the case on the medium term. Unfortunately, the essence of financing does not seem to change fundamentally, meaning a loan or a capital injection will never be a gift or a subsidy of a non-refundable nature.
Fortunately though, these alternative solutions show and amplify the problems of the traditional financial infrastructure, which may make not only the shareholders of the traditional market participants (universal banks, on the first place), but also the regulatory entities, think.
What shall an entrepreneur do when it comes to financing? First of all, it is strongly advisable to think about external financing not only in a critical, but also in an open way. They should not become experts of all the possible products and services, for sure, but also should not be blown away immediately by every simple piece of new invention. They had better concentrate their efforts on the core business, while keep their eyes open. Once they come to the conclusion to consider external solutions to finance and support their business development or growth, they should be able to find the right expertise to walk them through the essentials.
Right expertise, here, should mean expertise without own interests. Service and product providers are well-skilled and have the knowledge of their own services and products, for sure. But how can a single entrepreneur decide which one to chose, especially if the decision may have long term effects?
Do not be afraid to ask. And not exclusively your account bank. Financial advisors, more accurately corporate finance and funding advisors may come to the picture here, who must oversee quite some industries’ specifics and also financing opportunities. Those with many years of experience, also see the usual discrepancies, pitfalls, traps and may help to avoid them. Those with not only justifiable knowledge but also proper contacts may amplify the systematic demand experienced on the entrepreneurs’ side and suggest not only individual solutions but also ones which may initiate further product developments – on the product and service providers’ side. As some examples: systematically reoccurring demand my be pooled, providing a kind of natural diversity, for the financing entity, and short term, small scale demands may be automatised and standardised in terms of documentation, to speed up the process. With benefits for both the customer, the entrepreneur, and the service provider.
As a summary: there is expertise around that you can use for your benefit, without investing high amount of efforts. You just have to find it. Take the first step today. What can you lose?