Cash flow solutions for SMEs and startups
What repercussions will the Silicon Valley Bank and Credit Suisse collapse have when it comes to cash flow for SMEs and startups?
Seeing both go under in March made us all remember the GFC.
The truth is the circumstances were very different as the collapse of SVB came down to interest rates rather than irresponsible lending.
However, the end of this bank has left startups wondering how to get their hands on the funds they need to keep operating in this economy.
Right now, the problem with capital is that it’s expensive. Yes, the banks want to lend, but high interest rates mean credit solutions are getting harder to access and credit risk assessments are becoming more stringent.
So where’s the opportunity?
From my perspective, it partially lies in invoice discounting.
This allows a startup to quickly access capital without dilution on their cap table at a residual cost.
Or in the case of factoring to pass on the responsibility of collecting payment from an invoice to the financial institution that financed the capital upfront.
So:
🔺'Ace Startup' creates an invoice for a client
🔺The invoice is submitted to the factoring financing company, which pays 80-90 per cent of the value to Ace Startup
🔺When the client pays the invoice (sometimes up to 60 days later), Ace Startup receives the remaining funds, minus a fee that goes to the factoring financing company
The terms will differ based on a company operating model and payment cycles, but this arrangement solves the cash flow issue for a lot of business models.
With the cost of capital being higher right now, this is a potential short term solution that can be a win/win.