Login
ISCOVER
How can you spot when your SME clients are approaching hypergrowth? Here’s how to identify the signs, help them navigate this stage, and get funding to support it.
When an SME reaches the hypergrowth stage, many owners understandably see it as a cause for celebration. They may even instigate some lifestyle changes (e.g new car, new house) in a belief that it’s all gravy from now on.
Hypergrowth is a phase that was first defined in the Harvard Business Review around 2008. It refers to the point where an SME reaches a compound annual growth rate (CAGR) of more than 40%. However, because capital is needed to support it, this growth rate is not sustainable for most SMEs. Typically, a more sustainable growth rate is sub-20%, with businesses sustaining this growth based on profits generated by the business and relatively small debt facilities.
While it’s a good milestone for a business, hypergrowth needs to be carefully managed and supported by funding, so that the growth rate can be maintained at a more sustainable level. Exceptions to this would be SMEs who are in high-growth, newer industries with a dominant player, and/or where capital requirements are low.
A sign that your client’s business is heading on that trajectory would be where financial performance continually exceeds forecasts, even if the business is not yet close to ‘hypergrowth’, according to Andrew Fitzpatrick, Chief Financial Officer at Banjo.
“If a business has a strong existing capital position, or a clear roadmap to one, that allows for rapid growth in coming years, they could well be approaching hypergrowth,” he explains.
Another indicator is an SME winning a new contract that will significantly increase sales. Or they may be a niche business expanding into an overseas market off the back of domestic success.
Hypergrowth generally needs to be supported by funding to purchase stock, plant or equipment, hire more staff, and boost working capital. At this stage, it’s also critical that the business has adequate cash flow.
“Growth needs to be funded by good balance of equity or profit, and debt. As a general guideline, the preferred ratio is 30% equity/profit, and 70% debt,” says Jane Martini, Senior Credit Executive at Banjo.
“If there’s no cash in the bank despite being highly profitable, and the growth is being primarily funded by debt, that’s a bit of a red flag.”
Other red flags that give a lender pause include:
- no or limited evidence of meeting forecasts in the past
- a large step-up in growth percentage from current to forecast
- no strong business or strategic rationale for the growth aspirations.
“Forward planning is key to help your clients navigate hypergrowth financing needs,” says Andrew Fitzpatrick.
“The best brokers work proactively with businesses to understand both their current and future financing needs, looking at the business’ forecasts under different scenarios.”
“Encourage the client to think carefully about the risks, not just the benefits, of seeking hypergrowth. What are they putting at risk, to take the extra risk?” says Andrew.
One of Banjo’s customers, a niche clothing retailer, describes how funding gave them an advantage in hypergrowth phase.
“We knew we had the revenue coming in off the product, we knew the rate the brand was growing at, so we could accommodate a sizeable loan. It enabled us to manufacture [overseas] 6 months ahead instead of a season ahead. Having the working capital to manufacture and get it into the country 6 months ahead of when we needed it saved us a substantial amount of money.”
Jane Martini describes another Banjo customer, an online tableware company, that won a contract from a major retail store to stock their products.
“The contract will take the company into hypergrowth, and comes with capital requirements,” says Jane. “With their online business already profitable, a written plan for all aspects of the business – sales and marketing strategies, forecasts etc – they were a great candidate for funding.”
Another Banjo clothing retailer customer, who expanded into the US market, describes the need for external advisors during her hypergrowth experience.
“The growth has been so big in such a short amount of time, and I never thought I’d have staff. I’m not the best at managing people, so I’ve now got external help and consultants to help me build the team and make sure that I’m not the point of call for everyone all the time.”
“Encourage your client to hire a good accountant or financial controller to help them navigate hypergrowth. Often the client needs someone who can say ‘no’ to them, even though it may not be something they initially want to hear,” says Jane Martini.
Andrew points out that, rather than simply accepting the client’s opinion on the amount of capital they need, brokers will achieve more by working constructively with the client to scenario plan and sometimes even manage down growth forecasts and capital needs in the medium term.
JOIN THE DISCUSSION