Despite arguably one of the most challenging 18 months we’ve experienced in several decades, the world economy has experienced unprecedented growth in many sectors, including an upswing in the number of Australian SMEs.
As these businesses enter the market with great ambitions, many will be trying to find the answer to the single most asked question by business founders, “How do I get access to money?” It’s always been a challenge unless you are already well connected, but it’s even more difficult for those who are female, indigenous, or located in regional and rural Australia.
As a previous business founder myself, I am painfully aware of the hustle and struggle it takes to raise money. Capital at times seems elusive and when it’s made available it can come at crippling interest rates or the necessity of sacrificing equity and giving up control. The process of capital raising can often result in businesses not getting off the ground and even then, the struggle to continue to find capital or investment often distracts founders from running and growing their businesses.
Funding has typically fallen into two buckets, neither of which are in step with today’s fast-paced and dynamic fintech sector. The first is banking, which operates with traditional loan and interest formats which include collateral, credit checks and fixed-term paybacks. This works for some businesses but many baulk at the prospect of losing their home or car if their business falters.
The second is venture capital (VC) which requires a sacrifice of equity and a loss of ownership and control. That’s of course if you can secure VC funding at all. Just 2.3 per cent of women-led start-ups received VC funding in 2020 according to a report by the Harvard Business Review. Perhaps that’s why despite being almost 12 million female-owned businesses worldwide, just 25 per cent of female entrepreneurs seek funding for their businesses.
However, there’s a third funding option emerging that offers a welcome alternative to SME’s, revenue-based funding. This involves a business securing funding and then paying it back out of future revenues as the business grows. The concept has been around for some time in the form of royalty funding, but it’s evolved to become a very modern eCommerce-focused alternate funding mode.
Revenue-based funders (including Clearco) use AI and data science to strip out the traditional prejudices from the application process. Instead of decisions being made by auditors in a backroom who can take weeks to review data that is often six to twelve months old, revenue-based funders use real time data that considers sales, cost-of-goods sold, inventory and revenue, to make near immediate decisions. The decision process is quick, but the real time nature of the data reduces the risk to all parties and ultimately the costs for the business receiving the capital.
For Australian eCommerce businesses, it’s of particular interest because it is fair. It removes the often-encountered barriers like not having the right connections, being located outside the major cities or perhaps even not being a whiz at presenting your business plan.
In my company, this AI-based funding approach has resulted in us globally funding eight times as many companies headed by female founders as traditional VC firms. We also spread the wealth geographically so that more businesses outside main cities that are traditional funding hot spots are funded.
It’s worth exploring the third funding bucket. Be open to the possibility of a new and more equitable source of funding and perhaps your eCommerce business will be the next big retail success story.