Three Key Benchmarks Financiers Consider Before Funding A Small Business SMEs (small and medium-sized enterprises) make up 90% of all businesses. Nonetheless, access to financing continues to be a challenge for them as traditional banks prefer to work with bigger corporations, which are deemed less risky.
By Peter Maerevoet •
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When the idea to start a business begins to percolate, there is usually some sort of vision, fueled by a passion or sheer necessity for a product or service. After the "eureka" moment settles, something less novel enters the foreground to get a business up and running: money.
Most aspiring businesses face a major roadblock when it comes to financing their ideas, and it sometimes appears impossible to break the code that would get you accepted by major financial outlets, despite having innovative ideas and groundbreaking teams.
SMEs (small and medium-sized enterprises) make up 90% of all businesses. Nonetheless, access to financing continues to be a challenge for them as traditional banks prefer to work with bigger corporations, which are deemed less risky.
When opening a shop, a small business can explore alternative financing, where funding is based on the retailers'/clients' creditworthiness. Today, more than ever, a business's code of ethics matters too, so the stroke of genius that brought the company to life in the first place should also figure the well-being of society and the planet into it.
For a young outfit, the road to funding has been chartered by ambitious startups before it. Lenders, in fact, often assess applicants using a set of established benchmarks before they sign on to finance a company. Here's a breakdown on the three major benchmarks that are a no-brainer for financial institutions to consider before financing any business:
1. Creditworthiness of the candidates Many lenders expect a candidate for funding to exhibit a history of creditworthiness. For example, if a business owner operated a different company in the past, then a financial institution will check whether bills to suppliers were paid on time, or whether the opposite was true, and vendors received late payments, earmarking the company as tardy with their bills. A lender is likely to favor a business that has demonstrated agreeable relationships with their supply chain partners, and can submit payments on a timely schedule.
2. Creditworthiness of the retailers/other buyers The vetting procedure will also investigate the credit standings of the retailers and other buyers the business has worked with previously, or has already signed contracts with for future sales. Conducting due diligence on the retailers' financials is a core exercise for trade finance firms that serve exporters and importers small to medium in size. Instead of homing in on a small business's credit history to justify funding, these lenders use the credit information collected on their buyers, such as Walmart and Target, to determine whether to proceed with financing for the selling entity.
Apart from tracing the credit history of both sellers and buyers, a financial services firm will also study the profitability of a new business. Though early data may be limited in detecting profit-turning trends, profitability remains an important piece of information for lenders as a key indicator for a healthy performance. Startups, for obvious reasons, lack a long operating history. Despite this, they can qualify for financing from some trade finance companies, as long as other performance indicators, like a strong portfolio of buyers with good credit marks, are met.
3. Inclusion of environmental, social, and governance (ESG) business measures Today, many financiers are also committed to partnering with businesses that have robust ESG measures in place. These can include sustainable production methods, pledges to reduce carbon footprints, protocols to ensure safe workplaces, and efforts to promote inclusion and diversity. Lenders can opt to incentivize businesses that put a focus on their ESG frameworks.
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