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Supply Chain Financing Funds Operations, Limits Debt, Preserves Equity

In the world of business, cash flow often beats capital. Especially if you’re a small or medium business (SME) poised for hypergrowth.

I talk to a lot of company leaders each week. And surprisingly, 80% of the companies who want capital raising services don’t need capital. They need cash flow.

Instead of raising private capital, these SMEs should examine supply chain financing. Supply chain financing optimizes working capital without increasing debt or equity.

Their true problem? Lengthy order-to-cash cycles. Large corporations often impose payment terms of 60, 90, 180 days or longer. That crimps revenue and prevents SMEs from financing the components needed to fulfill the next big order – or orders.

What Is Supply Chain Finance?

Supply chain financing is the robust solution to bridge this gap. It often beats entering the world of venture capital firms, private equity and angel investors.

This method provides immediate cash flow, almost like adding lines of credit. SMEs can fulfill big orders without surrendering equity.

Supply chain financing turns your sales orders, purchase orders, logistics shipments and payment transactions into quick cash flow. That’s high-velocity capital without business owners giving up control.

Not all supply chain financing platforms are equal. The right fintech platform digitizes every piece of the supply chain. Then, it inserts cash where it’s needed and where it’s efficient. 

That requires end-to-end supply chain financing technology. That requires tech that includes payments, commercial deposits with yield, an embedded currency desk, workflow management, control tower capabilities and a procurement-as-a-service offering.

Combining supply chain visibility with a global securitization engine gives SMEs direct access to institutional investors. You can achieve scale and enter the global supply chain nearly immediately after joining the platform.

A Cost-Effective Business Plan for the Real World

Traditional financial institutions often cannot answer the real needs of SMEs. I know many examples where supply chain financing has proven more cost-effective.

One supply chain tech company wanted $15 million in equity to support anticipated hypergrowth.

Instead, supply chain financing helped the SME secure contracts in three sectors, contracts worth $15 million. That needed cash flow sustained operations and supported rapid growth.

This company literally scaled from less than $100,000 in business to $15 million. And the SME can always decide to raise funds later – on less dilutive terms.

A $15 million investment would have required giving up 30% of their company to investors.

If I tell you this company has less than $100,000 in sales, and they need $15 million, how much of that company should you own? Maybe all of it.

But what if that company has $18 million in annual sales with $8 million annual recurring revenue? That company is now conservatively worth $80 million.

Now, if the SME wants to raise $7 million, it only surrenders 7% or 8% in equity. The SME retains $74.4 million in equity.

If the SME had given up 30% in equity earlier? The SME would only have $56 million in equity. That’s a huge difference in financial statements.

Besides, few people want to bet on the future of a company that has $100,000 in sales. With that track record, your ability to raise capital is limited.

High-Level Exposure + Contract Leverage

Supply chain financing can expose your SME to the Teslas, Dells, GMs, Home Depots, Walmarts and Targets of the world. But the tech works with smaller customers that have great credit.

And if your customers have less-than-investment grade credit, trade insurance can make the deal go through.

You also gain critical leverage in contract negotiations. Big Company A wants days payable extended from 45 days to 90 days? Yes, you can. But now you ask Big Company A to pay an extra 5%.

Investors benefit as well. An order-to-cash cycle of 90 days might stink for an SME. But investors who can turn their money over every 90 days will smile. So, investors minimize risk, diversify portfolios, get a quick return on capital and gain access to investment grade investments.

Don’t Just Surrender to Capital Raising Services

For SMEs, true due diligence requires weighing the options between raising capital and enhancing cash flow. Supply chain financing offers a compelling alternative that preserves equity, improves liquidity and jump-starts hypergrowth.

Want to examine how such a short-term option could build the foundation for your company’s long-term success? I would love to discuss how you can maintain control and strategically position your SME for future opportunities.