Regardless of how successful your business is, there comes a stage when additional finance is necessary to reach the next level. This finance can be accessed through the form of equity or debt, and the capital can be used to expand your product base, enter new markets, or invest in your employees or into research and development. The timing of this move is crucial. Too early and you won’t be able to demonstrate your company’s historical growth or afford the repayments. Too late and you may be overtaken by competitors that have taken the opportunity to grow quicker than you have. As the first peer-to-peer (P2P) lender in the UAE, Beehive has developed a deep understanding of the factors affecting timing.
To finance or not
One of the most important factors to consider is whether or not the finance will really fuel the exponential growth of your company. Do not take a loan for the sake of it or because it seems like a natural next stage in the business process.
Instead, you need to consider whether it is really worth the investment, because this is a large commitment and not one that you can back out of without the risk of legal action, bankruptcy or even takeover by lenders.
The next step is to consider whether you, as a business owner, can afford the repayments tied to the loan. If you can, then take that lump sum today and grow your business.
If not, it may make sense to consider equity crowdfunding instead. This involves selling part of your business to investors via a crowdfunding platform where your finance request is covered by a number of people who invest small amounts of money in your business, product or idea.
The benefit of equity crowdfunding is that experienced investors can also bring new skills and opportunities to the business. The downside is that you will end up owning a smaller share of your business and, in some cases, may have to consult your investors before making certain management decisions. This type of finance is generally more suitable for start-ups, as the investors share the business risk and the business owner does not have to pay any interest or repay the funding.
However, if your business is an established, credit-worthy small to medium-sized enterprise (SME) looking to finance working capital for expansion, it is preferable to retain full ownership of your company by borrowing money rather than selling more shares.
Credit checks
When you do approach a financial institution for finance, make sure that you are prepared for thorough credit checks by consistently keeping your accounts in order over time. A business that is able to offer audited financial statements makes a much stronger case for an overdraft, a loan or flexible financing and credit terms.
If you apply for finance at too early a stage in your business’ growth, you may not have sufficient credit history to demonstrate financial strength. Adequate bookkeeping over at least two years is required from SMEs seeking funds for working capital and expansion from platforms like Beehive.
Much like banks that provide finance for SMEs, P2P funding platforms review financial records and a range of credit risk variables, relying heavily on documentation created through reliable bookkeeping. If an SME can produce this, it demonstrates that it is well-managed, transparent and committed to success.
Once the documentation is submitted and the credit checks begin, you must be prepared to invest time and resource into the process. Management must be available for meetings with the lender to discuss competitors and your place in the market, amongst other factors.
Timing is crucial for young businesses when considering taking on debt, but each business is different and the process depends entirely on what your objectives are for growth. What it really boils down to is whether additional finance will have a big enough impact on your business at this stage to warrant the investment, and whether your business model enables you to afford to take on the capital.
— The writer is CEO of Beehive, the region’s first P2P finance platform
