Maroc - NEWSDAY.CO.TT - A la Une - Hier 03:34

From startup to scale-up: Financing growth in SMEs

Dr Judith MS Mark Financing growth is essential for scaling small-and medium-sized enterprises (SMEs) in TT. Despite recent innovations in financing, many continue to rely on traditional funding sources, primarily because of gaps in financial literacy and access to equity networks. From angel investors and venture capital to government-backed funds, the range of innovative financing solutions is growing, each offering unique pathways to expansion. This guide reviews the local equity options available to facilitate advancement in scalable and growth-oriented SMEs. Effective growth financing aims to align the cost and flexibility of the financing structure with the company’s growth potential and cash flow. As companies scale, the financing instruments often vary based on the firm’s profile. Notwithstanding, there is a general financing path for firms. This is demonstrated in the financing lifecycle diagram. Lasrado’s 2013 diagram is still relevant today, as it provides valuable insights into the financing lifecycle for growing businesses. It outlines key stages and funding sources tailored to the unique needs of companies as they scale, helping to clarify the financial instruments best suited for the different stages and supporting sustainable growth. Four equity sources – angels, venture capital, private equity and initial public offerings (IPOs) – are discussed below in the context of TT. Angel investors are typically high-net-worth individuals who provide financial capital to companies to support growth. Angel investing in TT continues to be a closed-circuit activity available to entrepreneurs in a given social network. Venture capital (VC) is usually invested in firms with the potential for high growth and returns. A key characteristic of VC is the advisory services which accompany the funds. VC providers generally fund niche areas with the potential to scale. The key to success is the relationship defined in the shareholder’s agreement. [caption id="attachment_1134360" align="aligncenter" width="269"] Dr Judith MS Mark, business strategy and enterprise development consultant and lecturer. -[/caption] Private equity (PE) investments are beneficial interests in privately held companies. SMEs seeking growth finance in TT are generally reluctant to engage in external equity financing. This is primarily because of concerns over access to information, outsiders’ influence and mistrust issues that can limit the growth potential of these SMEs. Initial public offerings (IPOs) allow growth firms to raise capital from a large pool of individual and institutional investors. IPOs should be pursued when SMEs have adequate governance and management systems and openness to disclosure. The financing dilemma: Understanding SME funding sources A review of the financial landscape suggests a muted appetite for equity-based financing. The absence of equity networks and gaps in financial literacy programmes have contributed to SMEs’ continued use of traditional sources. Internal funding is preferred, while less-used sources include factoring, leasing and venture debt. • Internal financing is the use of company profits to finance further growth. The decision to use internal funds is based on the lower cost of financing relative to debt or equity. The “closed arrangement” also allows for privacy, reduced legal obligations and continued internal control. • Factoring as a financing option occurs when a company sells its receivables at a discount to a third party to meet short-term liquidity needs or to fuel growth. Factoring is more timely than other forms of financing, and does not require collateral. • Lease financing is a useful option for companies pursuing growth, which often requires investment in plant and machinery and modern technology. Lease financing, as used by SMEs in TT, enables access to assets without the cash outlay associated with buying. • Venture debt is a lesser-known source of funding used to scale businesses backed by equity. It provides for the injection of liquidity between rounds of equity financing to supplement working capital. Key players in equity financing in TT Given SMEs’ low demand for non-traditional growth financing options, only a handful of companies provide these services in TT. Local companies dedicated to directly providing equity financing include: • Aspire Fund Management Company Ltd. Managing director Kerwyn Valley said, “Aspire focuses on companies wanting to scale. The guiding philosophy is multi-generational wealth creation. Scalability, growth, market demand and innovativeness are factors considered in the company’s investment decision.” Aspire has invested US$35 million in a portfolio that includes SMEs with the potential for high growth and returns. [caption id="attachment_1134361" align="alignnone" width="1024"] -[/caption] • Development Financing Ltd provides debt and equity to SMEs seeking growth capital. • Firstline Securities Ltd also supports SMEs in seeking financing from the right investor. The company is among intermediaries that provide growth-oriented SMEs with the opportunity to receive funds by matching companies with angel investors and equity and debt providers. Financing for SME growth is also available through state initiatives and financial and business advisory intermediaries that match SMEs with investors. The Government and Development Bank of Latin America and the Caribbean (CAF) signed a US$35 million investment loan on October 8, 2024. These funds, which will be administered by EximBank, are expected to address the financing gaps in export-oriented SMEs. Financing fit: Aligning strategy and capital The optimal mix of financing for growth occurs where the financing structure is customised, based on the realities of the SME. Customisation is driven by innovativeness on the part of the leadership of the SME and the providers of capital. The fit between firm philosophy, growth strategy, growth financing, leadership, governance and capital management is paramount in the way scalable, growth-oriented SMEs are financed. Innovations in growth financing continue apace globally. However, in the absence of information and success stories from firms using non-traditional sources, many SMEs in TT are likely to pursue growth using known, traditional options, thereby limiting their contribution to the economy.   The post From startup to scale-up: Financing growth in SMEs appeared first on Trinidad and Tobago Newsday.