Why SME Funding and Growth Strategies go Hand in Hand.

April 20, 2021

At the heart of SME growth strategies is the requirement for the right strategy to be supported with the right SME business funding option, be it debt, equity or another form of financial support. Growth and indeed rapid growth rarely happens without the right business funding support, although choosing and following the best growth strategy is often half the battle.

Entrepreneurs and business leaders leading lower mid-market SMEs are tasked with a variety of management concerns but at the core of most decisions is clarity on where a company is going and plans for its development. This is true in both recessionary and growth environments – strategic focus is everything in business.

For the UK, SMEs and those individuals that lead them are incredibly important. This group of businesses are the lifeblood of the UK economy accounting for over 60%[1] of all private sector jobs in the country, which equates to employment for over 16.5 million people. There are estimated to be about 5.9 million private businesses in the UK, of which 99% can be classified as SMEs; and they have a combined turnover that exceeds £2.3 trillion which is 52%[2] of the UK’s total.

SME Business Funding Support

It is therefore imperative that such companies not only choose the right path but have the right financial structures in place to assist this growth. The strategy taken often directs businesses to the type of funding support they require. Businesses can rarely stand still unless they want to lose ground to competitors.

So what growth paths do SMEs tend to follow?

International Markets – Market Development

Entering overseas markets is a strategy employed by many UK businesses, and especially those seeking to expand their market opportunities. Whilst there are many barriers when pursuing this option, the sales results and profitability levels can if be very worthwhile providing all the research has been undertaken beforehand.

Very few SMEs however can undertake this route without not only great planning and support from expert advisors but supportive SME business funding. This may entail working with a funder who has both overseas expertise (i.e. an understanding of foreign exchange markets) and funding flexibility. Very often this is where the business owner must develop an incredibly close relationship with their funding partners because entering foreign markets is not for the faint hearted.

Most medium sized companies will employ one of the following approaches when looking at international markets:

Indirect methods (where they will work with buyers in the UK)
Direct methods of exporting (where they are in direct contact with buyers/distributors/agents in their selected markets)

Other options include joint ventures or for some large SME manufacturers, setting up sites abroad. This latter option carries enormous risk and cost.

For many SMEs developing an international market is not a straightforward decision. Take a look at HITEK Electronic Materials, a manufacturer of components for the electronics industry, and the steps they took to move into overseas markets[3].

Channel Development – Routes To Market

Standing still in business is no longer an option especially if there is a need to stay ahead of the competition and profitable. Those organisations that rely upon a single route to customer interaction will in time fall foul of the way markets and channels of communication continue to grow. Alternative routes are now, for most businesses in the B2B and B2C arenas, a way of life.

For those businesses that have ignored the digital route and focused upon a more traditional model (i.e. Direct to retail or wholesale outlet, or even to customers they already know) there is a need to re-evaluate from a customer perspective and recognise that buying habits have changed and will continue to evolve.

Many SMEs have found that the use of alternative channels is the best and most cost-effective way of growing a business. Many smaller and mid-size SMEs fail to understand the power of the digital world and even fail to invest in a functioning website, which is a bare minimum requirement for a business wanting to grow.

SME business funding support is often linked to this channel development strategy as it involves the development not only, in the digital world, of a fully functioning ecommerce platform but accompanying development in customer services, fulfilment and marketing. Equally, through an increase in market sales and reach it could also impact operations around manufacturing, importing, exporting, operational organisation, staff recruitment and delivery. All of these developments come at a cost.

There are host of examples of SMEs which have grown as a result of channel development, a prime example being Music Magpie, the world’s biggest reseller of physical media.[4] This business invested heavily in digital channels as a means of expanding its market presence.

Diversification – Product Development

Diversification and product development are both high risk strategies but ones if planned and funded correctly can bring high returns.

The first strategy, diversification, when a business looks to enter a new market with a new product requires a great deal of thought, time and ultimately funding. It not only involves developing a new product, but it essentially means developing a new product for a market that they do not understand.

The alternative and a better strategy for SMEs is to continue the development of their existing product range in line with a market that is understood. Ultimately, there is the option to use this knowledge to embark on a new market strategy with a higher level of understanding of their target audience.

Diversification and product development strategies both require SME business funding support, but the range of financing requirements is dependent upon the business plan’s objectives; and also the complexity of product being developed and the market being targeted.

This approach has been used by several SMEs as a means of growing their business. For instance, food & drinks companies often introduce or piggyback new products into an existing or new market in order to grow market share. The alcopops market of the 90s was a prime example with artisan gin companies taking a similar approach. Take a look at Slingsby Gin, a producer of artisan gin that has combined product development with channel development as a means of growing its business.[5]

Partnerships

Partnerships often seem like the best way to grow a business as it invariably involves combining businesses that are both complementary and supportive; and have client bases that do not overlap. Such an approach provides in the right cases the opportunity to cross-sell and up-sell the products and services of both groups.

Some of these partnerships will require SME business funding in order to support shareholder changes, exiting shareholders and operational changes (e.g. manufacturing expansion, tooling, office moves etc.). Most partnership arrangements will however focus on a contractual arrangement of mutual support.

SME partnership arrangements can be more complex as they involve a commercial arrangement between companies with a pre-existing market share and perception. The aim is to share a vertical market so that each partner’s products are mutually supportive. The right arrangement can result in an expanded market.

Take a look at Mckinsey & Company’s review of partnership principles.[6]

Acquisition

Acquisitions cost money. SME business funding to support simple and complex acquisitions is often a pre-requisite. Yet this approach is one way for an SME to expand quickly providing, of course, not only has the right acquisition been made, but cost savings identified. The wrong acquisition can be costly in so many other ways i.e. reputation, business momentum, culture differences.

For SMEs in certain markets consolidation is a natural way of growing and this invariably involves identifying likely targets with trusted advisors. A buy and build approach is not an unusual approach for lower mid-market SMEs as it is a way to achieve economies of scale quickly.

In the private equity arena buy and build strategies are a prime way of growing a business quickly. This involves focused debt and equity funding support both to back the acquisition but also to fund the integration.

Recent sector examples of companies that have benefitted from a focused acquisition strategy include VetPartners (Founded in 2015 and sold in 2018 for £700m following numerous bolt-on acquisitions)[7], consolidation in the dental market (e.g. Oasis Dental Care Ltd., Dental Partners and Dental Care Group)[8], private school groups such as Chatsworth Schools, and care home providers.

Segmentation – Audience Focus

For all SMEs chasing growth it is mandatory that they understand their market and their target market. A growth strategy employed by focused SMEs is market segmentation which is a method of breaking down a target market into distinct groups or segments.

This is achieved though clear differentiating factors (and depends upon the product/service being sold) such as customer preferences, geography, product selection, interests, age and gender to name just a few. For some SMEs having a thorough understanding of segmentation is a way of ensuring that marketing and sales strategies can be both personal and appropriate.

Targeted campaigns and distinct offers ensure that activity is much more effective, sales to lead ratios are reduced and profitability is improved. Those SMEs that understand the power of segmentation are happy to invest in ensuring that not only are the best systems in place to capture this information but also that the best team are in place to take advantage of the data that they obtain.

As a result of an accurate and effective approach to segmentation there is invariably a need to fund expansion of operations to fulfil a larger client base…and then to move to another supportive market approach such as overseas expansion!

SMEs that understand their market and their audience are in a much better position to grow than those that rely upon a static market view.

Those companies that use segmentation approaches include those on digital platforms such as Amazon and eBay where advertising can be tailored and targeted to specific audience groups. Consumer focused SMEs using this approach include cosmetic companies, clothes retailers, and food & drink businesses.

In summary

Leading an SME business that has ambitions to grow can be a thankless task for the managing director and selecting the route to take for the next phase of growth can be complicated. It is at this stage that working with a Board that can support strategic decision-making is not only essential but imperative. Equally working with external advisors that can offer advice and support through the planning and implementation stages can be both critical and cost effective in the long term.

Finally, whichever route is selected an appropriate source of SME business funding is required to support those next steps. The important thing at this stage is to form a relationship with a business funding partner that not only shares your vision for the business but can help you understand the finance dynamics that will come into play over the short, medium and long term.

For further information on how FDC can support you and your business download our SME Debt Funding Pack, or talk to an Investment Director.