Globally, around 20.8% of small businesses closed as a result of the COVID-19 pandemic. This reflects the importance of having financing plans to sustain the operations of small and medium-sized enterprises more effectively in complex contexts such as the one now. Randall Castillo Ortega, the founder of SME financing firm RACO Investment, discusses what small- and medium-sized enterprises need to consider when contemplating financial options.
Financing is the fuel that SMEs need to achieve their goals and objectives of expanding production, territorial expansion, or simply daily operations. Through it, they receive the economic support to obtain all the necessary inputs such as raw materials, recruitment and payment to collaborators or suppliers, etc. However, there are a number of barriers for SMEs to have access to financing and, in addition to this, there are some myths about the debts they generate, causing companies to adopt bad financial habits that even tend to put them at greater risk.
In this sense, it is common to pigeonhole all financing channels as credit or as debt. This generalization is rarely analyzed and, given the lack of knowledge, it does not delve into the existing options in the market, for each moment in which the company is located. “According to some surveys,” explains Castillo, “92% of the SMEs polled claimed to make use of financing to pay debts, which reflects the lack of well-formulated capital plans, affecting the liquidity of small and medium-sized companies.”
Given that, it is critical to establish proper and well-formulated planning to maintain healthy cash flow. While there are bad practices on the part of some SMEs in terms of their dependence on financing, obtaining capital from financing sources is not synonymous with something negative. Visualizing financing beyond being an urgent need in the short term will boost the financial health and growth plans of SMEs because, in addition to making them more competitive, it will collaborate to achieve more stable finances and contribute to their adaptability to the market.
But it should be borne in mind that there are more than just credits (which in themselves represent a liability and require collateral). There are other alternatives to financing that do not necessarily involve debt, such as factoring or financing through accounts receivable or even raising funds through an investment round.
Thinking of financing as an ally rather than a last resort contributes to improved cash flows, better access to working capital and better preparation by companies for any unexpected eventuality. On the other hand, resources such as factoring not only help ensure the liquidity and continuity of the company in the short term, but also offer other competitive conditions for SMEs. For example, they can have access to better prices and discounts when buying inputs in payments of a single exhibition (since they receive up to 80% in advance on their invoices, they can allocate that money to this type of operating expenses), or focus on covering expenses of their day to day that help them in their growth and expansion.
It is worth mentioning that the acquisition of credits or financing must be planned. “Always contemplate elements such as the ability to pay, risk assessment or the investigation of the best alternatives for access to capital for good financial management,” asserts Castillo.
Leveraging through loans and other capital injection resources is key to meeting various needs in the short or long term. However, for them to be truly effective, they must be used strategically and not as the last survival alternative.