How Unstructured Growth Can Kill SMEs

 In Daily Column

Good times can also bring problems
Good times can also bring problems

The financial rumor mills are at it again. A quick surf today revealed warnings that the ATO is set to take an aggressive stance toward SME debtors after remaining somewhat passive during the GFC.

None of the articles, mind you, explored what types of SMEs were most at risk.

SMEs (like any enterprise for that matter) have business lifecycles. Initially, personal savings are often the most important source of finance. Young firms tend to be highly risky with intangible assets and the prospect of years of negative earnings. These features make it extremely difficult to secure a loan from banks unless personal assets are used as collateral.

As the business matures, personal funds become depleted, and external funding sources become more important. SMEs at this juncture, are  generally not large enough to attract the attention of venture capitalists, and many are ignorant of (or too conservative to consider), business angels.

So it’s back to the bank, a 2nd mortgage and fending off creditors. All this whilst you’re trying to grow the business.

Leigh Dunsford from AR Cash Flow contends that ironically it is during later (supposedly stable) growth phases that many SMEs sow the seeds of their own fate.

“An upsurge in business activity is generally accompanied by an increase in the number of creditors. This in turn stymies growth because cash reserves are used to cover fixed and variable costs instead of funding business development,” said Dunsford.

Concerns around wages and the like can often become all-consuming for small business owners. Dunsford claims many of these concerns can be allayed by using accounts receivables to fund growth.

However, many business owners I’ve spoken to over the past six months believe that debtor financing means handing over all their accounts receivables for a lengthy period.

“Nothing could be further from the truth!” exclaimed Dunsford. “We can provide funding off one or two clients for short periods to get customers through a tough time or seasonal shortfalls. Debtor financing is more flexible than most people think,” said Dunsford.

Growth is exciting. However, it literally pays to keep a weather eye on creditors when expanding your business.

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