From the CEO's Desk

You know your business has potential, but investors demand hard evidence to back that claim. Getting money from investors can really help small businesses grow bigger, reach new customers, or create better products. But to get this money, you need more than just a good business – you need clear proof of what your business is worth.

What Does Business Worth Mean, and Why Does it Matter?

Working out what a business is worth means finding its money value by looking at its numbers, what similar businesses are worth, and how well it’s doing. This number is very important when you want investors to invest or when businesses merge.

Small businesses that want investors must show how much they’re worth. This:

Demonstrates Business Potential: It portrays the company’s growth curve and potential for long-term profitability.

Builds Investor Confidence: Being transparent renders an explanation of where investors are putting their money.

Facilitates Negotiations: Acts as a benchmark to avoid undervaluation or overvaluation during funding negotiations.

With a balanced valuation, businesses can demonstrate their value and attract the capital they require to succeed. Let’s now discuss the crucial factors that investors consider in the process.

1. Financial Performance and Stability

Investors primarily seek strong financial performance. It highlights a company’s ability to generate sustainable revenues. Key metrics such as:

Revenue Trends: Successive periods of increase in revenues establish market acceptance and operational efficiency. Seasonal variation is also studied for demand cycle trends.

Profitability Metrics: Looking at how well you turn sales into profit at each step – after costs, after running costs, and after everything else.

Cash Flow Management: Investors want to see steady or growing cash flow, as it shows you can grow, pay off loans, or share profits.

Debt Levels: A good business shouldn’t owe too much compared to what it owns – this shows it’s stable.

Investors often review audited financial statements for transparency and credibility. A company with organised records stands out.

2. Market Opportunity and Growth Potential

Investors are more likely to bet on a business that will enjoy high growth rates either because of the industrial sector it belongs to or because of the important market gap it solves. Key considerations include:

Trends and Opportunities: How well your business fits with emerging trends like AI technologies or green initiatives.

Competitive Positioning: This is what makes you special, along with your strategy to keep getting more customers.

Barriers to Growth: Things that might slow you down, like rules, too many similar businesses, or trouble getting supplies.

3. Unique Selling Proposition (USP)

Businesses that have something special about their product or service have a better chance against others. Investors examine:

Innovation: Proprietary technology, patents, or innovative solutions are one-up on the competition.

Customer Loyalty: An established customer base or an NPS above the industry average would indicate that the market accepts and trusts it.

Barriers to Entry: High initial investment requirements, good branding, and exclusive agreements reduce attractiveness to competitors.

A clearly defined USP serves as a catalyst for higher valuations.

4. Strong Leadership and Governance

Often, it is said that the calibre of a business’s leadership team is a precursor to future success. Investors assess:

Experience: Founders and executives with a proven track record are considered less risky.

Vision and Strategy: A clear vision paired with actionable strategies demonstrates preparedness and ambition.

Governance Structures: The existence of clear audit processes and well-documented policies augment investor confidence.

Strong leadership, combined with a capable team, creates a positive perception of the business’s ability to execute its plans effectively.

5. Risk Management and Contingency Plans

No business comes without risk, but the way that risk is managed differs. Investors look for:

Identified Risks: Clarity on market, financial, or operational risks.

Mitigation Strategies: Detailed plans for countering identified risks, including insurance, diversification, or redundancy measures.

Crisis Management History: Evidence of successfully navigating past challenges or economic downturns.

Risk-aware businesses signal preparedness and resilience, factors that heavily influence valuation.

6. Revenue Diversification

A diversified revenue stream minimises dependence on a single source, thereby reducing financial vulnerability. Investors value:

Product or Service Range: Companies operating on more than one product or service do not suffer from the vagaries of demand as much.

Client Base Diversification: A business being dependent on one big client can be dangerous; a diversified client base increases the safety dimension.

Geographical Reach: Expanding into different regions or countries can cushion against localised market slumps.

Revenue diversification showcases stability and adaptability, bolstering investor confidence.

7. Scalability and Operational Efficiency

Businesses designed to grow without proportionately increasing costs are especially attractive. Investors assess:

Economies of Scale: The ability to reduce per-unit costs as production increases.

Technology and Automation: Adoption of technologies for cost-efficient improvement and reduction of overheads.

Operational Processes: Streamlined, repeatable processes that facilitate scaling.

Scalability indicates that the business can handle increased demand while maintaining profitability.

8. Customer Metrics and Engagement

Customer data provides a snapshot of the business’s relationship with its market. Investors consider:

Acquisition Costs (CAC): A low CAC highlights the cost-efficient marketing and sales strategies.

Retention and Churn Rates: High retention rates and low churn suggest customer satisfaction and loyalty.

Engagement Metrics: Reviews, repeat purchases, and referral rates are indirect signals of customer trust and advocacy.

Strong customer metrics suggest a sustainable and growing customer base, enhancing valuation.

9. Industry Benchmarking and Competitive Analysis

Investors compare businesses to industry peers to understand relative performance. Key comparisons include:

Performance Metrics: Investors measure performance relative to industry results, tracking what is important to such an investor, including revenues, profit margins, and return on equity, or ROE.

Innovation Leadership: Firms that are first movers in emerging technologies have an easy strategic advantage in terms of innovation leadership. Well ahead of their peers, they exemplify adaptability and assume the posture of a market leader in innovation.

Sustainability Practices: Compliance with industry-specific sustainability norms increasingly impacts competitive standing.

10. Environmental, Social, and Governance (ESG) Factors

Increasingly, ESG has become one of the critical factors considered in investment. Investors look for:

Environmental Responsibility: Efforts undertaken to reduce carbon footprint or sustainable practices.

Social Impact: Contributions to community development or fair labour practice.

Governance Standards: Transparent decision-making and treatment of all stakeholders equitably.

Companies which go into strong ESG initiatives tend to have a better valuation because they align themselves with modern investor priorities.

How Pulse Supports Your Business Valuation

Pulse empowers SMEs to present their business confidently to investors by offering powerful financial insights and tools. With features like detailed financial reports, real-time updates, and automated management accounts, Pulse simplifies financial management and enhances transparency.

It provides clarity on key metrics such as sales/turnover trends, profit margins, and debtor-creditor ratios, helping businesses highlight their strengths and address investor priorities effectively.

Whether preparing for growth or securing funding, Pulse equips you with the insights needed to align with valuation drivers and showcase your true potential. Contact us at info@mypulse.io to take charge of your financial story today with Pulse!

Did you know SMEs (0-250 employees) are 99.9% of all enterprises and represent more than half (52.5%) of the UK’s turnover?

This sector plays a crucial role, and yet these companies often face laborious loan application procedures that feel far from supportive. Why do the smallest businesses (0-49 employees), which represent 99.2% of all businesses, constitute only 67.6% of turnover? Might easier access to funding free them up?

But think of a better way to get a loan for your business. A way that is faster, easier, and more accessible than ever before. And all this was made possible by fintech lenders. This blog shows how new tech like automated processes (RPA), smart systems (ML and AI), and easier banking tools help fintech lenders process SME loans faster.

How Fintech Makes Small Business Loans Better

Imagine you run a small business and need money to grow, hire staff, or buy equipment. With regular banks, you’ll face piles of forms and long waits, often just to be turned down. Fintech lenders are all set to change this by offering digital platforms that cut through red tape to give access to capital.

From automation to open banking, these fintech companies exploit sophisticated technology to make the applications faster, cheaper, and more customer-friendly, increasing SME access to the financing needed.

RPA in Lending: Automation at Its Best

• Automates Repetitive Tasks: Uses AI to mimic human actions for tasks like data entry, verification, and compliance checks, saving time on routine processes.
• System Compatibility: Interacts seamlessly with diverse systems (e.g., web browsers, databases, and spreadsheets) without coding or integration requirements, enhancing workflow flexibility.
• Error Handling: Can manage exceptions and errors based on predefined rules or escalate them for human review, maintaining process quality.
• Data Extraction: Automates the collection of data from documents such as bank statements, tax returns, and invoices. Since data will be automatically filled in loan application forms, fewer chances of introducing errors or committing fraud.
• Data Verification: Data is cross-checked with external sources like credit bureaus and government databases, and flags are raised in case of any discrepancy, ensuring accuracy and compliance.
• Automated Document Generation: Automates lending offers, contracts, and reports based on data and underwriting criteria, resulting in a smooth flow of communication and a great customer experience.
• Impact on Efficiency: Reduces turnaround time and increases customer satisfaction significantly by avoiding delays in complex processes.

According to Deloitte, a study notes that processing time can be reduced by up to 90%, increasing accuracy by up to 100% and costs by up to 80% for fintech lenders. It also scales up or down according to the demand and volume of loan applications without requiring any additional staff or infrastructure.

This gives fintech lenders a competitive edge over traditional banks that rely on manual processes and legacy systems that are prone to errors, delays and inefficiencies.

AI and ML in Underwriting

Fintech lenders also use AI and ML tools to process loan applications more efficiently and accurately. Whereas traditional banks are largely rule-bound and have linear models, AI-powered underwriting views a broad scope of data, including transaction histories, cash flow trends, and market conditions, to build far more nuanced insights into the creditworthiness profile.

In fact, a study by McKinsey suggests that underwriting models from ML and AI can increase approval rates by up to 50%, lower the default rate to up to 40%, and reduce the interest rate to up to 20% for fintech lenders. This leads to more rational lending decisions, reduced costs and risks, along with better experiences for customers.

User-Friendly Application Processes

Perhaps the biggest headache associated with accessing a loan from a traditional bank is the paperwork, documentation, and verification required. Most SMEs find this process frustrating and stressful when they need quick funding. Fintech lenders have fixed this issue by making the application simpler, easier to use, and more accessible.

Fintech lenders let SMEs apply for loans online whenever and wherever they want, without needing to go to a bank or make calls. They use digital tools like e-signatures, fingerprint scanning, and digital ID checks (e-KYC) to verify who borrowers are and if they qualify, all without paper forms or in-person visits.

Fintech lenders use online methods to keep borrowers updated about their loans and when to pay them back. For instance, we utilise Onfido verification here at Pulse for the users accessing our data analytics services.

Enhanced Customer Service

One of the advantages SMEs are sure to get when considering a fintech lender over a traditional bank is quality customer service. Fintech lenders have thoroughly invested in building solid relationships with their customers by offering more personalised, responsive, and flexible support.

Fintech lenders use digital tools like live chat and video calls with 24/7 support for the borrowers through their journey. Fintech lenders also use CRM systems to provide customer feedback, preferences, and behaviour and offer customised solutions and incentives. Fintech lenders also use NPS and CSAT metrics in order to track customer loyalty, retention, and referrals and then take steps to improve them.

Fintech lenders can also develop a community of loyally engaged customers who share their experiences, reviews and testimonials on social media and online platforms. As a consequence, fintech lenders end up with a competitive edge against traditional banks that operate as impersonal, slow, and rigid customer service providers.

Open Banking (OB) and Open Accounting (OA)

OB and OA enable fintech lenders to connect directly with the bank accounts or SME accounting software without having them share login credentials or download statements. This means a fintech lender immediately obtains updated financial information, like income, expenses, cash flow, invoices, etc. The fintech lender can then make decisions on loan eligibility, amount, and terms.

APIs are standard protocols for applications that allow different systems and applications to talk to each other safely and efficiently. An API, which enables open accounting and open banking, allows data aggregation and analysis, providing fintech lenders with better insights that the service can then use to recommend the financial health and performance of a small SME.

However, there are also enrichment and categorisation capabilities using APIs, which provide fintech lenders with a finer and more contextual comprehension of the financial behaviour and preferences of SMEs.

Streamlining Loan Applications in the Real World with Pulse

Pulse is an AI-powered dashboard designed especially for SMEs to understand financial performance better. With comprehensive data always at their fingertips, SMEs can make the best-informed financial decisions and be given access to essential funding when needed most. Using an integration with a business’s bank or accounting software, a business can easily share real-time financial data and enable a paperless loan process.

Pulse is an extremely agile, AI-driven platform that feeds business owners real-time analysis to help them make smarter financial decisions. Get in touch today to learn how Pulse can help transform the way your SME makes financial decisions and gets access to funding.

Welcome back to the Fintech CEO series, where I dive into the hottest topics in the financial world. In this instalment, we’re going to talk about something that affects everyone, from governments and banks to businesses and consumers: interest rates. You’ve probably heard that interest rates are on the rise, but do you know what that means for your business? If you’re a small or medium-sized enterprise (SME), you might be feeling the pinch of higher borrowing costs, lower investment returns, and tougher market competition. 

In this entry, I unravel the multifaceted implications of rising interest rates on SMEs, analyse the financial hurdles they will encounter, and explore strategies to navigate through these turbulent times. By understanding the nuances of this economic landscape and implementing proactive measures, SMEs can thrive and adapt to the ever-changing financial environment. 

Understanding Rising Interest Rates 

To grasp the impact of rising interest rates on SMEs, it is essential to first gain a comprehensive understanding of what interest rates represent and their significance for small enterprises. 

Defining interest rates and their significance for SMEs 

Interest rates serve as the cost of borrowing money and the return on lending capital. They are determined by various factors, including central bank policies, inflation levels, and overall economic conditions. For SMEs, interest rates play a crucial role in shaping their financial landscape. 

Small businesses often rely on loans and credit facilities to fund their operations, invest in growth opportunities, or manage day-to-day expenses. Changes in interest rates directly impact the cost of borrowing for SMEs, influencing their profitability, cash flow, and overall financial viability. 

Examining the factors contributing to rising interest rates 

The recent surge in interest rates can be attributed to several factors, with inflation being a key driver. High inflation erodes the purchasing power of money, prompting central banks to intervene by raising interest rates to curb excessive spending and maintain price stability. 

In addition to inflation, other factors, such as global economic trends, fiscal policies, and geopolitical events, can influence interest rate movements. These intricate dynamics create a complex environment where SMEs must navigate the repercussions of rising interest rates. 

Challenges Faced by SMEs 

As rising interest rates become a reality, small businesses are confronted with a myriad of challenges that can impact their financial stability and growth prospects. Let’s explore some of the key challenges that SMEs may face in the face of escalating interest rates. 

Increased cost of borrowing and its effect on SMEs’ financial health 

One of the most immediate and tangible effects of rising interest rates on SMEs is the increased cost of borrowing. As interest rates climb, the cost of obtaining loans, credit lines, or financing for SMEs also rises. This can have a direct impact on their profitability and financial health. 

For SMEs that heavily rely on borrowing to fund their operations or invest in expansion projects, higher interest rates mean a greater burden on their finances. Repayment obligations increase, potentially leading to reduced cash flow and lower profit margins. The increased cost of borrowing can limit the financial flexibility of SMEs and restrict their ability to allocate funds towards critical areas such as research and development, marketing, or hiring talented employees. 

Impact on investment and expansion plans 

Rising interest rates can also cast a shadow of uncertainty over the investment and expansion plans of SMEs. As the cost of borrowing increases, the return on investment for potential projects may diminish. SMEs may become more cautious in pursuing new ventures or scaling up their operations, fearing that the higher borrowing costs might outweigh the expected benefits. 

The reluctance to invest and expand can have implications beyond the individual SMEs themselves. It can dampen overall economic growth, as SMEs are significant contributors to job creation, innovation, and productivity enhancement. The ripple effect of reduced investment and expansion can be felt across industries and can potentially hinder the overall economic development of a region or country. 

Evaluating the effects on cash flow and working capital management 

Another critical area affected by rising interest rates is cash flow management for SMEs. As interest expenses increase, SMEs may experience a strain on their cash flow, making it more challenging to meet financial obligations such as paying suppliers, covering operating expenses, or maintaining sufficient working capital. 

SMEs with limited cash reserves may find themselves in a precarious situation, where they have to carefully balance their cash outflows with inflows. This delicate juggling act can impede the day-to-day operations of the business and may even lead to missed payment deadlines, damaged supplier relationships, or disruptions in the supply chain. 

To address these challenges, SMEs must be proactive in their financial planning and explore strategies to mitigate the potential risks associated with rising interest rates. 

Strategies for Mitigating the Impact 

In the face of rising interest rates, SMEs need to be proactive and implement strategies to mitigate the potential impact on their financial well-being. By adopting prudent financial management practices and exploring alternative funding options, SMEs can navigate through these challenging times. Let’s delve into some practical strategies that can help mitigate the impact of rising interest rates. 

Conducting a thorough financial assessment and risk analysis 

SMEs should start by conducting a comprehensive financial assessment to understand their current financial position and vulnerability to rising interest rates. This assessment involves analysing cash flow projections, debt obligations, and existing financial commitments. By understanding their financial strengths and weaknesses, SMEs can identify areas that may require immediate attention and develop strategies accordingly. 

Furthermore, conducting a risk analysis enables SMEs to identify potential threats and vulnerabilities arising from rising interest rates. This analysis can help them prioritize risks and develop contingency plans to mitigate the impact. By being aware of their risk exposure, SMEs can take proactive measures to protect their financial stability. 

Exploring alternative funding options for SMEs 

SMEs should explore alternative funding options to reduce their reliance on traditional bank loans, which may become more expensive due to rising interest rates. Alternative funding sources such as peer-to-peer lending, crowdfunding, or venture capital can offer viable alternatives to secure financing for business expansion or working capital needs. 

Additionally, SMEs can consider asset-based financing options where they leverage their assets, such as accounts receivable or inventory, to obtain short-term financing. Factoring or invoice discounting can be effective solutions to improve cash flow without incurring high interest costs. 

Developing effective cash flow management strategies 

Effective cash flow management becomes even more crucial in an environment of rising interest rates. SMEs should closely monitor their cash flow and implement strategies to optimize it. This can include negotiating favourable payment terms with suppliers, implementing stringent credit control measures, and accelerating the collection of receivables. 

Furthermore, SMEs can explore strategies such as lean inventory management, optimizing production schedules, or negotiating better terms with vendors to reduce costs and improve cash flow. By proactively managing cash flow, SMEs can mitigate the impact of higher borrowing costs and maintain financial stability. 

Utilising hedging mechanisms to manage interest rate risks 

To protect themselves from sudden interest rate fluctuations, SMEs can consider utilizing hedging mechanisms such as interest rate swaps or options. These financial instruments allow SMEs to fix their interest rates for a specific period, providing stability and certainty in loan repayments. 

Working with financial advisors or experts who specialize in hedging strategies can help SMEs identify the most suitable hedging instruments based on their specific needs and risk appetite. Implementing hedging mechanisms can offer SMEs a level of protection against future interest rate hikes and minimize the impact on their financial performance. 

Merging AI and Open Accounting to improve cash flow visibility 

Open Accounting takes cash flow management to the next level by providing real-time access to financial data. It involves integrating accounting software, bank feeds, and other relevant platforms to create a seamless flow of information. SMEs can connect their accounting systems directly to their bank accounts, enabling instant synchronisation and up-to-date financial insights. 

When AI and Open Accounting join forces, SMEs gain unparalleled visibility into their cash flow. AI algorithms can analyse vast amounts of data collected through Open Accounting, supplying valuable insights into receivables, payables, and overall cash flow performance. 

Through this synergy, SMEs can accurately monitor and forecast cash flow fluctuations, identify potential bottlenecks, and take proactive measures to optimise working capital. Whether it’s managing inventory levels, negotiating payment terms, or identifying opportunities for cost savings, the combination of AI and Open Accounting revolutionizes the way SMEs approach cash flow management. 

By adopting these strategies and embracing proactive financial management practices, SMEs can navigate the challenges posed by rising interest rates. 

My Take on Rising Interest Rates 

The impact of rising interest rates on small businesses cannot be underestimated. In the beginning of this year, there were hopeful whispers that interest rates would stabilise and gradually descend by later in the year. Unfortunately, the tides have turned, and inflation has stubbornly refused to wane, leading to a scenario where interest rates are poised to climb even higher and persist at elevated levels for an extended period.  

As businesses navigate the challenges of rising interest rates, they have a golden opportunity to adapt, innovate, and emerge stronger than ever. By fine-tuning their business operations to enhance efficiency, optimise pricing and diversify revenue streams, SMEs can not only withstand the impact of higher interest rates but also thrive in the face of adversity. 

Effective budgeting, rigorous cost control, and a relentless pursuit of operational productivity will empower SMEs to weather the storm of rising interest rates. By streamlining processes, embracing technology and fostering a culture of continuous improvement, SMEs can unlock new levels of efficiency and profitability. 

To stay ahead of the game, SMEs must remain informed and agile. By keeping a keen eye on economic trends, seeking guidance from seasoned professionals, and staying open to new ideas, SMEs can make informed decisions and navigate the ever-changing business landscape with confidence. 

While the notion of rising interest rates may initially seem unsettling, it’s crucial to understand the bigger picture. These measures reflect the unwavering commitment of central banks to tackle inflation and maintain a stable economic environment. By recognising the underlying intent, SMEs can embrace a more optimistic perspective. 

The recent 50 basis points (bps) increase in interest rates clearly demonstrates the Bank of England’s determination to bring inflation under control. This decisive action lays the foundation for a healthier and more sustainable economic landscape, paving the way for SMEs to thrive in the long run. 

So, let’s view rising interest rates as an opportunity for growth and resilience. By embracing change, exploring innovative strategies, and leveraging the underlying intent of these measures, SMEs can position themselves for success, ensuring their continued growth and prosperity in a dynamic and evolving business world. 

At Pulse, we understand the challenges faced by SMEs and are here to support you every step of the way. By fusing together Open Banking and AI technology, you can obtain x-ray vision for the financial status of any business and spot any cash flow issues long before they occur, with detailed insights on various data points to gauge financial health. Contact us to learn more.