If an SME’s house is in order, then not all debt is bad debt

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A number of those who do qualify for funding are holding back because of third-wave uncertainty, making the type of financing they need even more important. Photo: iStock/Gallo Images
A number of those who do qualify for funding are holding back because of third-wave uncertainty, making the type of financing they need even more important. Photo: iStock/Gallo Images


Many small and medium-sized (SMEs) businesses are struggling to cope with debt that has accrued because of the hard lockdown in last year and the various economic restrictions aimed at curbing the Covid-19 pandemic.

This has had a direct impact on some businesses’ ability to apply for funding, highlighting the importance of acting in time to protect credit records.

A number of those who do qualify for funding are holding back because of third-wave uncertainty, making the type of financing they need even more important.

There’s definitely been an increase in SMEs across sectors that are struggling to meet lending qualification criteria as a direct result of adverse credit bureau scores and bank account conduct. This is driven predominantly by rental arrears and overdue accounts with suppliers.

In many instances, business owners have left it too late and have waited for judgments before applying for finance. The more prudent step for them would be to seek intervention earlier.

It is of paramount importance that business owners understand that their financial conduct has a long-term implication on their ability to raise funding. For example, a judgment takes time – there is a long process to follow preceding it.

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An SME may settle payments after a judgment has been made and then follow that by applying for funding. However, while there may have been a marginal improvement in the SME’s credit score, the cumulative effect of missing payments and debit orders, along with the judgment, will rule out its creditworthiness.

When this happens, it is too late, whereas funding may well have helped the business navigate out of trouble, had its owner acted sooner.

The key for SMEs is to focus on getting their affairs in order and tightly controlling the costs of running their businesses.

We have seen that SME owners who have had a tight rein on their business expenses have been able to navigate the storm because they had a longer runway.

On the other hand, those who were looser in controlling their expenditure have either been casualties of the pandemic, or – in many instances – have found that they do not qualify for funding.

SMEs that have prioritised cost-cutting and have come through last year and the first quarter of this year are in a stronger position, with many of them proving to be resilient businesses.

They may also have a backlog of rental arrears or supplier payments because of being unable to trade during the various stages of lockdown. The difference, however, is that if they need funding to take advantage of an opportunity, they can get that lender support, benefit from the opportunity, methodically pay off the arrears and get back on to a solid footing.

READ: Support small business if you want to grow the economy

In the past three months, 49% of advances were used for stock. This talks to cash flow pressure and would include settling supplier arrears, which reopens credit lines with preferred suppliers. The knock-on effect of this would be that they secure stock at lower prices and lift their profit margins. When on stop-supply, they would be forced to buy elsewhere – often at higher prices – which would further affect cash flow.

Over the same period, 20% of all advances were for general cash flow, including settling creditor and rental arrears. In both instances, SMEs would have needed to have their businesses running properly to access the funding.

Many credible funders, from banks to alternative lenders such as Retail Capital, have a wealth of experience and knowledge, and business owners would do well to ask for help.

If a business’ house is in order and they need a step up to recover, they can get advice from credible lenders on the best way to structure a funding arrangement. Retail Capital’s in-house team of experts will sit down with an SME and plot how best to structure the funding to suit the business’ requirements.

We find that many SMEs put their heads in the sand, so to speak, hoping their problems will disappear
Alex Appleby

In the past month, many clients who did qualify for funding have chosen to take a cautious approach. They have chosen not to accept the money for fear that lockdown restrictions will affect their ability to service the debt.

Retail Capital believes it has a responsibility in the industry to educate small business owners about products such as our MCA service, where the business pays in line with turnover performance. In other words, if the turnover drops by 50%, so does the repayment. This is quite different from traditional funding models.

Our head of treasury, Alex Appleby, agrees that it is important for business owners to communicate sooner than later – and not only with funders, but also with their creditors.

“That’s probably one of the most critical things,” he says. “We find that many SMEs put their heads in the sand, so to speak, hoping their problems will disappear.

“But they’d find that if they engaged with people, two things would happen: one, they would realise that it’s much easier for a credit provider to put funding into a business that’s demonstrated a commitment and put payment plans in place, and two, a funder would be able to work with them to find the best product and terms for them and their business,” he says.


SMEs that are battling to operate may also find it difficult to appreciate that there are times when debt can be good for business.

Debt for debt’s sake, or digging one hole to close another, is unsustainable. However, if an SME has done well in keeping its costs down and has promising prospects, debt becomes a powerful tool to take advantage of an opportunity to increase revenue and ultimately grow.

“To illustrate this point, an SME could leverage its final position over a stipulated period to make an investment – such as buying an important piece of equipment – which would result in higher revenue and growth over time,” says Appleby. “That’s good debt.”

When used responsibly, debt can help grow a business
Alex Appleby

He adds that a working capital product could work in a similar fashion: “When used responsibly, debt can help grow a business. For example, a business owner may wish to take advantage of a bulk stock purchasing opportunity.

“In this case, immediate access to funding would allow the business to secure and unlock supplier discounts. That, in turn, would result in higher margin as the stock is turned. As the cycle repeats, it adds to the bottom line and the growth of the business. This example explains how a good relationship with a funder makes business sense.”

Appleby stresses that business owners should keep close tabs on the ratio of debt in their SMEs.

“Businesses that are highly geared may find it difficult to attract funding, especially if current funding levels are putting cash flow pressure on them. There’s no one-size-fits-all approach here – it varies from business to business. However, I’d advise all business owners to understand this aspect of their business and, if they don’t, they should seek advice and support,” he says.

Tessendorf is head of sales at Retail Capital


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