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Battered and bruised by two years of COVID disruption, Australia’s SMBs are emerging from lockdown and looking to grow again. But getting funding remains challenging.

A recent survey by Judo Bank found that despite government efforts, many SMEs were cold-shouldered by banks during the pandemic, with one in four unable to secure funding.

When capital is available it’s often at cripplingly high-interest rates. Banks may require collateral, putting a business owner’s home at risk if the business falters. For many SMBs the risk is too great, even if they pass credit checks and meet bank criteria. Traditional bank loans may also not provide the level of funding needed.

Venture capital is also difficult to access. Most VC firms don’t invest in smaller businesses and those that do have stringent requirements that many SMBs can’t meet. VC firms may also want founders to sacrifice large amounts of equity and cede control of their companies.

The struggle to secure finance

For certain founders, such as women, indigenous and rural businesses, the situation is particularly difficult. It’s not a problem unique to Australia: according to Crunchbase data 2.8 per cent of funding (an all-time high) went to women-led startups in 2019, but fell to just 2.3 per cent in 2020.

With banks unwilling to lend, many SMBs are having to look at new and creative options for getting funding. Government grants have been a key source of support throughout the pandemic, with state governments offering some funding to businesses affected by COVID. There are also grants for specific sectors as well as for indigenous businesses.

But many SMBs fall outside the eligibility criteria or need funding more quickly than the grant application process allows for. At a time when businesses need to undergo rapid digital transformation to remain competitive, being able to invest in new tools and technology is critical. Asset finance and hire purchase are possible options but only apply if the investment is for a specific physical entity, such as vehicles or machinery.

A new funding option: revenue funding

Some Australian SMBs are now turning to a new funding option – revenue-based funding – which can be much safer and more flexible than traditional methods. With this model, businesses secure funding and repay it from future revenues as their business grows. There’s no collateral or dilution of ownership – particularly critical for early-stage startups with huge growth potential.

Overall it’s a similar concept to royalty funding but has evolved to become much more sophisticated, using AI and data science to strip out the traditional prejudices from the application process.

This means barriers such as being in a remote area, or having a female or minority founder, no longer apply. Additionally, the investor isn’t taking an equity stake in the business nor getting a seat on the board, so there’s no loss of control.

Aligning investor and founder interests

Repayments are directly proportional in relation to revenue, which aligns with the interest of the business and the investor. If the business is doing well and making higher gross profits, the loan term will be shorter.

If profits are down, the repayments will be lower – so there’s less pressure in leaner times for businesses that have quieter vs busier seasons. All in all, it’s a much more flexible and adaptable system than a conventional loan.

Australian-founded EdTech startup Zookal is one business that has successfully scaled its business via Clearco’s revenue-based funding. Zookal’s services are aimed at making education more accessible to students throughout Asia-Pacific, offering affordable e-textbooks, homework help, test preparation and a solutions library.

The company took its first capital advance in July 2021 to support its entry into Singapore and the Philippines which resulted in 10,000 new daily users in two weeks.

According to co-founders Ahmed Haider and Manuel Silva, Zookal has two peak periods in the year where its marketing expenses and inventory double or even quadruple.

“In August, rather than paying $1.5 million to our suppliers and having to forego that capital in the same month, revenue-based funding gave us the chance to extend that inventory payment eight months on average, which extends our runway a lot. In terms of marketing, we’ve moved away from using credit cards.”

Another Australian SMB trying our revenue-based finance is the men’s grooming marketplace, Beard Market. It took its first advance in May 2021, for 15 per cent of daily sales, and has seen 200 per cent revenue growth. Founder Onur Cam says it’s the most profitable funding for his business.

SMBs are a very valuable part of Australia’s economy. They employ over 7,600,000 people and represent 55 per cent of GDP according to the Australian Small Business and Family Enterprise Ombudsman. ASBFEO Bruce Billson says that 40 per cent of small business revenues get invested back into the community.

Having better funding options to help SMBs grow, which are much more in step with their needs and progress, is a win for the whole economy.

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Dan Peters

Dan Peters

Dan Peters is Managing Director of Clearco Australia. He has more than 20 years of digital experience including over a decade in senior director positions at Google, most recently as Director of Strategic Partnerships from 2017-2020. Dan returned to the world of start-ups in 2020 as a co-founder and Chief Revenue Officer at the next-generation payments start-up, LimePay. Previously he was a co-founder of Cleardocs, a disruptive legal-tech solution, which was sold to Thomson Reuters in 2011.

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