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The latest ScotPac Business Finance SME Growth Index revealed that 94 per cent of SMEs are seeking new capital, with 29 per cent believing they could face insolvency if they were to lose a major supplier or client.
Gus Gilkeson, the CEO of Grow Capital, emphasised that while short-term loans can be useful in some circumstances, they should always form part of a broader, long-term strategy.
“Short-term bridging loans are great if they’re helping you achieve your longer-term goals. Buying an asset, for example, might require short-term cash for a longer-term return,” Gilkeson said.
However, he warned that if a business constantly requires short-term funding to cover cash flow gaps or address planning shortcomings, it may be time to reassess the overall business plan.
“A bridging loan should be exactly that – a bridge to get to the other side. But you need to have that pontoon on the other side in the first place,” Gilkeson said.
Frequent reliance on bridging loans could negatively impact a company’s credit score and hinder future lending opportunities. Gilkeson said that having multiple credit inquiries within a short period can harm a business’s commercial credit file.
Additionally, entering into lending agreements with high-interest-rate short-term funders can lead mainstream lenders to view the business unfavourably.
“It’s similar to someone who frequently uses payday lenders being refused a home loan by a major lender down the track. The financial institution looks at that history and thinks there may be a bigger, underlying issue,” Gilkeson said.
To avoid falling into the bridging loan trap, Gilkeson advised businesses to take a few key steps. Firstly, businesses should understand where they currently stand in their growth journey.
There are five stages of business development: existence (start-up), survival (viability), success (stabilise or grow), scale (expansion), and maturity. Understanding which stage your business is at and where it is headed over the next six, 12, and 24 months can provide important insights for long-term planning.
It’s also crucial for businesses to expect the unexpected. Planning for potential challenges such as personal or family illness, weather events, or supply chain disruptions will help ensure that the business is prepared for any scenario.
Although these issues are outside of a business’s control, contingency planning can mitigate their impact. Gilkeson also stressed the importance of staying updated with regulatory changes.
“It’s vital to stay up to date with industry developments and changes so your business can be as prepared as possible, and not be caught on the hop,” he said.
Building buffers – whether time or monetary – is another critical strategy.
Gilkeson said: “It’s better to over-estimate how much time or money a project will require and end up pleasantly surprised, as opposed to finding yourself running out of either and requiring that short-term bridging loan simply to get through to the end.”
Looking ahead, Gilkeson believes that businesses should already be considering their plans for the 2024–25 financial year.
“Right now, I would expect that most business owners are already considering the end of the 2024-25 financial year, what that looks like and starting to plan accordingly,” he said.
Those with a solid business plan should be thinking even further ahead – at least one to two years. This is especially important when considering that long-term lenders often expect businesses to present projections for that far in advance, if not longer.
“If you’re serious about securing long-term finance, then you also need a long-term strategy,” Gilkeson said.
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