If you are a small business-owner who has recently come across the term financial intermediary, you may well be wondering whether this is a simple or a complex concept?
In simple terms, it refers to an institution or an individual that serves as a middleman for different parties during a financial transaction. Often, they play an important but understated role in enabling transactions to go ahead, while providing the lifeblood for SMEs and entrepreneurs who are wishing to scale successfully. The best example of such an intermediary is a bank, which channels funds through investments and deposits and uses these to commission loans for aspiring borrowers.
3 Benefits of Leveraging a Financial Intermediary
While this explanation may offer an insight into the core function of a financial intermediary, however, it is important to understand the benefits that they offer before you take the plunge. Here are three of the most intriguing:
- Access the Funds to Scale Your Business
Let’s start with the basics; as financial intermediaries provide you with funds that can be used strategically to scale and grow your venture. If we use banks or private lenders as an example, these institutions offer capital to potential borrowers so long as they can deliver a viable business plan and security (traditionally in the form of a fixed asset such as a home or commercial office). This money can then be reinvested into your business and paid back out of paid earnings, according to a rigid, monthly payment plan.
While banks serve as the most rigid type of financial intermediary, they do offer transparency and security. They also encumber the business with long-term debt, so consider the amount that you need carefully before signing any agreement.
- Modern Intermediaries Offer More Flexible Solutions
Since the financial crisis of 2008, we have seen the fiscal landscape shift to embrace more flexible methods of funding. Many of these agile vehicles offer choice and shorter-term repayment spans for borrowers, enabling SMEs to optimise their cash flow while also minimising debt levels in the business.
Take companies such as Marketinvoice, for example, who offering a factoring service through which companies can sell their accounts receivable to a third-party investor. This allows smaller firms to negate 60 and in some instance 90-day payment terms, optimising their levels of cash flow and working capital at any given time.
The debt is simply repaid when the invoice in question is settled by the client, creating a progressive intermediary that can be used sporadically and flexibly throughout the business.
- Equity Crowdfunding Connects SMEs with Investors
We also live in an age of peer-to-peer lending, where it is easier than ever for business-owners to access like-minded investors and entrepreneurs who are looking to back exciting start-ups. Crowdfunding is the best embodiment of this, with the relatively new equity model serving as a financial intermediary that offers value to all parties.
Through equity crowdfunding, you can raise a desired amount of capital from a host of private investors, offering relevant equity shares in exchange for the cash. This enables you to leverage a fluid and motivated intermediary platform, and one that also minimises the cash debt associated with the business.
So long as you set viable targets in terms of the amount of money that you want to raise and how much equity you are willing to sacrifice, you can use this type of crowdfunding to help realise your commercial dreams.