The Banks, The Debt And The Equity: The Heroic Journey Of The SME

“A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: The hero comes back from this mysterious adventure with the power to bestow boons on his fellow man.”

Joseph Campbell, The Hero With A Thousand Faces

heroic journey The startup’s journey towards success is a heroic one – and I do mean ‘heroic’ in the literary sense of the word. Indeed, the businessperson’s story as he fights his way through an obstacle-laden, enemy-guarded pathway to prosperity is comparable to practically any hero’s journey – from Prometheus to Batman to Mo Farah – and if you’re in business, then you will know this better than most.

Your rivals will want to see you fail, and attempt to outmanoeuvre you in any way they can in order to win the day themselves. Challenges will occur, for which you may often feel unequipped, and so you will once more have to dig deep, and rely on your wits and your particular skills to get you through. You will form allies along the way, make new friends, and, of course, new enemies. But this is an inevitable part of the business owner’s heroic journey, and indeed it is the part that makes the most important survival trait of the hero most apparent – the ability to grow.

Banks – The Enemies Of The SME

If growth is disabled, then the SME’s journey will, sooner or later, come to an abrupt end. In film and in literature, the hero will grow throughout the course of the story, often in terms of internal and external strength, as in The Karate Kid, The Social Network, and of course The Godfather. The respective protagonists from all of these films begin with a challenge that they must overcome, and, as their strength grows throughout the course of the narrative, they find the ability and the means to defeat the challenge. Ultimately they become stronger, richer and smarter – and it us upon those criteria that their success is forged.

SMEs face the same challenges in order to succeed – unless meaningful growth is achievable, then any hopes of becoming stronger and richer are thwarted. But, even so, this should not prevent them from becoming smarter.

A perhaps unlikely foe of the SME has turned out to be the traditional banking system. Whereas once banks were the uncontested allies of business owners, providing them with loans and other finance that were needed in order to grow, these shape-shifting entities have now largely become the antithesis of funding for the SME – the obstacle to growth, the enemy of financing, the betraying Iago to the hero Othello, if you will.

Indeed, in the wake of the economic downturn, banks have been failing SMEs left, right and centre. As many as 50% of first time borrowers have been rejected finance by their bank, according to the UK Department For Business Innovation and Skills. The frightening thing is that with SMEs dominating the UK private sector by a whopping 99.9%, the banks are not just big enemies to the SME, but hard working antagonists to the whole economy as well.

Alternative Finance – The Ally Of The SME

For SMEs to grow and prosper, they need finance. When they can’t get it from the bank, the bank becomes the enemy of prosperity, and thusly the enemy of the SME. It is at this stage in the story that a lot of firms fail. This isn’t because they don’t have the capabilities and heroic qualities needed to succeed, but rather that they are simply unaware of the allies that are out there that can help them.

As much as 42% of SMEs are completely unaware of the alternative finance options that are there to help them along their heroic journey to success. Furthermore, according to, “9% of SMEs who were familiar with at least one form of alternative finance stated not having enough knowledge about alternative finance platforms as the main reason for not using them.”

This is a shame, as such platforms are the true allies of the SME, but without a more widespread understanding of what alternative finance can offer, then more businesses will continue to fail unnecessarily.

Funding – Equipping SMEs With The Tools For Success

The Route – Finance wants to be part of the solution in this respect. Our team understands that SMEs are the undisputed heroes of the economy, and we want to take the role of champion and guardian angel in the story, and equip our journeying protagonists with the tools that they will need for success. Think of us as the Q to your 007 – but instead of complicated gadgets, spike umbrellas and submarine Lotus Espirits, we furnish you instead with knowledge and finance.

In our previous blog posts we provided you with the story of The Rise And Rise Of Alternative Finance and with A Guide To Alternative Finance Platforms. Without knowledge, heroes cannot grow – and without finance, neither can the SME. And so we’d like to now extend your knowledge even further by delivering to you here some further explanations of forms of alternative finance options that are available to you, in order that awareness and understanding can continue to increase as to how you may overcome the obstacles and challenges that have been set down to halt your growth.

Two Tools – Debt And Equity Finance 

When it comes to seeking out the means in order for SMEs to grow their business – or indeed to simply get that business to a stage where it is generating revenue and ultimately profit – often what is required is support from either a long or short-term backer, who will be in a position to fund the venture until it reaches this stage and beyond.

Traditionally, such a backer will have been the SME’s bank. However, as we know, banks have found themselves in positions where they are either unwilling or unable to provide finance for business owners like they used to.

This is an obstacle that many SMEs face in today’s business world – but it is not one that cannot be overcome, and in actual fact, the alternatives are often better than the traditions.

Alternative finance options are a-plenty these days – if you can’t get funding from your bank, then there are now plenty of other places that you can turn (and in fact, you’d do well to look to these options first). However, funding is very rarely free. In exchange for the capital put forward by the backer, either interest will be expected on the return, or otherwise a percentage share in the business. In this sense, there are essentially two options available to the borrower – equity finance and debt finance, both of which are explained for your convenience below.

Equity Finance 

Put very simply, equity finance describes a situation where capital is raised via the sale of shares in a business. Often, such equity is sold to third-party investors who have no existing stake in the business. However, equity finance can also be sought from existing shareholders – normally by selling bigger shares to them.

The reality of equity financing is that, over the course of the SMEs journey, many different shareholders will be registered, all owning small or large amounts of the business.

The British Business Bank produces a PDF that explains this quite succinctly:

“Founding shareholders will have put the initial equity into the business. Friends or family may have ‘invested’ in the early stage of a business’s journey, then business angels may take an equity stake. Venture capital (VC) investors (also known as venture capitalists), corporate venture capitalists or private equity (PE) investors tend to be the option for the growth phase. Financial institutions or the wider public may invest in equity through a listing of the company’s shares. The public may also acquire equity stakes through equity crowdfunding platforms. It is not as simple as this in reality – business angels, for instance, invest at many stages of the business’s growth. As it progresses, a company’s shareholder register will be a mix of investors who have taken stakes at different stages of its journey.”

Equity investors typically expect a higher return than debt providers (see below) due to the fact that the endeavour will tend to require a longer-term commitment from the investor. This return is usually paid in dividends or realised in capital growth – both of which depend on the business’s ability to succeed and strengthen in terms of profitability and its ability to generate cash.

Importantly, equity investors neither have their capital paid back to them by the borrower like debt financers do, nor have they any rights to interest on the initial investment – and in fact this is perhaps the distinguishing factor between the two.

Equity finance and debt finance

(Image Source: British Business Bank)

Debt Finance

Debt finance is best sought by those who are looking for a powerful cash injection, which they plan to pay back relatively quickly, without the investor being left with any stakes in the business.

There are different forms of debt, however, which can essentially be broken down into three broad categories:

  • Loans and overdraughts
  • Finance secured on assets
  • Fixed income debt securities

To explain, loans – which can be sought from banks, or other means such as peer-to-peer (P2P) investments – occur when a capital sum is borrowed from a lender under the condition that it will be paid back with interest at a specified date or multiple dates.

Finance secured on assets, as the BBB explains, “includes debt instruments such as asset finance (leasing or hire purchase) and ABF (invoice discounting (ID), factoring, asset-based lending (ABL) and supply chain finance). These are provided by most banks and specialist asset finance and ABF companies including some online platforms.”

Fixed-income debt securities are in the form of bonds, which are
a way for companies to borrow money from investors in return for regular interest payments. They have a predetermined ‘maturity’ date when the bond is redeemed and investors are repaid their original investment.

Utilising Your Allies

Which friend to turn to along the route to success and sustained growth will all depend on what stage the business is at. Indeed, it is often the case that businesses will need to make the most of both types of financing throughout their lifetime, as short-term debt-based capital will not be suitable to fund long-term plans, and long-term equity financing will often not be the right solution for businesses looking for a short-term boost.

The task of the SME, of course, is to acquire the right mix at the right time, in order to overcome the various challenges that are thrown down along the journey to prosperity. Achieving growth is not an easy thing for any business, and failure is not uncommon. That is why the journey can only be described as heroic – becoming stronger, richer and smarter are the marks of success as much as they are the marks of growth. But, with a careful and considered utilisation of a business’s most valuable allies, ultimately the SME will find the tools, the strength and the finance to power on through to growth, profits and prosperity.

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