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Businesses at a time of recession: how alternative finance options are helping companies survive and thrive

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Ian Duffy, CEO, Accelerated Payments

 

While the current landscape is challenging for all businesses, it is crucial to remember that crises can drive innovation and create new opportunities. Recessions have led to the growth of the most well-known companies on the planet: Disney was started alongside The Great Depression, Microsoft began during an economic downturn, and FedEx was launched during a recession too.

The crucial element for any growing company is to quickly and easily obtain the finance to grow. Unfortunately for many business owners, banks are becoming less of an option for raising capital as the past decade has changed how traditional banks deal with businesses.

This has paved the way for the emergence of game-changing alternative finance providers, which are helping business owners grow faster than ever. These include revenue-based finance companies, merchant cash advance providers, and invoice finance leaders – all of which are more accessible than traditional banks, and with seamless user experiences. Each of them has its unique benefits and use cases.

Revenue-based finance providers are when lenders provide finance based on a percentage of a company’s future revenue. If a company applied for a £10,000 loan, it  might agree to pay back 5% of their monthly revenue until the loan is repaid, plus a monthly fee. This option does not require founders to offer collateral, nor do they need to provide equity in their business.

If the market changes or sales decrease, repayments will also slow too, which is favourable for businesses affected by factors beyond their control. Revenue-based finance is an ideal avenue for new but growing companies searching for quick access to cash without giving away equity or spending time raising capital – such as eCommerce providers with a solid local audience who want to expand to another territory.

Another financing option for businesses during a recession is merchant cash advance providers – similar to the revenue based model in that they provide cash in exchange for a percentage of future sales. This type of finance is often used for physical brick-and-mortar businesses like restaurants, hospitality or retail businesses that see fluctuations in trade.

The amount a business can borrow typically depends on the credit rating, sales projections, and business size. Businesses repay according to a factor rate, a multiplier that depends on the business’s credit score. Generally, this form of finance is used for the short term and is flexible, and can be helpful for refurbishment or purchasing inventory – for example, when a restaurant wants to take advantage of a quiet period to expand its premises.

Lastly, Invoice Financing is a powerful option for businesses whether there is a recession or not. In boom times, companies need to raise capital quickly to accelerate business growth; in recessions, Invoice Finance can be a critical pillar of supporting cash flow. However, recently, Invoice Finance has been a lifeline for those companies increasing exports to countries outside the EU post-Brexit.

Over the past couple of years, 87 per cent of small business owners in the UK have reported losing money. The UK Invoice Finance sector has played an essential role in helping businesses to recover, with research revealing that 27 per cent of companies (with a turnover of between £1M and £500M) use Invoice Financing.

Invoice Financing works through the finance provider using an  invoice as security for funding. Invoice finance providers quickly give  access to a percentage of an invoice’s value, which can be especially useful for businesses with large corporate clients whose payment terms can range from 90 to 120 days.

Finance providers gauge which invoices to fund by using a client portal that allows businesses to upload and select invoices for funding – once approved, payment is advanced to the company, usually within 24 hours. This speed is crucial as the faster the business can obtain that revenue, the quicker it can be reinvested.

This reinvestment could be in a new marketing campaign, part-time staff, or software that can drastically improve operations. It can be particularly helpful when an established business is looking to experiment with a brand-new area of business.

Recession or not, while it is well-known that half of new businesses do not survive the first five years of their business – the ones that do survive need strong cash flow.

No matter how a business raises capital, what matters most is that it can do so quickly and easily. This new variety of options means that strong, resilient companies will not be knocked down by the winds of recession but instead will use the challenging environment as an opportunity to regroup  and access new means of finance for growth.

Banking

Building towards an inclusive financial future

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By Catharina Eklof, CCO of IDEX Biometrics

  

From the visually impaired to displaced migrants, the unbanked, and people living with dementia – a burgeoning financial gap exists across many areas of society. In fact, as of late 2021, almost one-third of adults around the world were reported as unbanked according to the World Bank Group. That’s around 1.7 billion people – with half coming from the poorest 40% of the world’s population. Being financially excluded in this way means not having access to common financial services including savings accounts, loans, a credit rating, or even a bank account. Those who are awaiting clearance to join a country’s financial ecosystem, such as migrants, are also finding themselves left behind by the modern financial infrastructure.

As societies reliance on digital and contactless transactions over cash continues to grow, this financial gap is only set to widen. In less than 10 years, the share of Americans not using cash for payments has increased by double digits, reaching 41%. By 2031, cash payments are expected to make up only 6% of all transactions.

Fortunately, biometric smart cards can bridge this gap for people in the Global South, migrant populations, as well as those with visual or cognitive disabilities worldwide, who deserve to feel secure, included, and independent.

 

The challenges surrounding passwords

 COVID accelerated the transition from cash to contactless payments and the use of digital wallets, creating a challenge for many. By 2024, it is expected that digital wallets and cards will account for 84.5% of all e-commerce spend.

Digital transactions traditionally rely on the use of PINs that can easily be forgotten, as studies have found that we manage 100 passwords on average across various sites and services. In the US alone, consumers report relationships with more than three financial institutions and have more than four accounts per household. The challenge of password recollection is only growing. To counter rising cybersecurity threats, several countries now mandate two-factor authentication for retailers and service providers, creating further complexity.
However, organizations are responding to financial exclusion. Card provider Mastercard introduced its contactless PayPass offering, as well its Touch Card developed alongside Amjan Bank which enables the visually impaired to distinguish between their cards. Both look to provide a better customer experience for people struggling with the digital changeover. For those living with dementia, Mastercard has also partnered with Sibstar and the Alzheimer’s Society to create a specific card where limits, transactions, top-ups and notifications can be viewed and managed via a complementing app. Likewise, Turkish neo bank Papara introduced a Bluetooth debit card that provides visually impaired users with audio prompts when making payments.

 

Protecting the visually impaired

There are at least 2.2 billion visually impaired people globally. In 2019, it was found that 89% of visually impaired have been victims of fraud or have made errors when paying for goods and services. This figure comes prior to the pandemic, and the proliferation of digital transactions, suggesting an even bigger concern today.

PINs present an obvious security issue for this demographic, with others able to oversee their inputs and then manipulate them. Contactless payments go some way to solving that problem but pose the risk of fraud as there is no PIN verification below the increasing threshold amount, now at £100 in the UK, where the average annual wage is £27,756. In India, where the average annual wage is 9,45,489 rupees (roughly £9000), contactless limits are set to 5000 rupees (£48). Many accounts also require visual-based inputs to prove identity, such as CAPTCHA, proving as a barrier for the visually impaired.

Enhancing awareness on a regulatory level is key for driving change and reassuring vulnerable groups. The EU Accessibility Act is an example of how payment service providers are obliged to comply with accessibility standards. This includes making interfaces perceivable, operable, understandable, and robust, to ensure that individuals with disabilities can effectively navigate payment interfaces.

 

Paving the way with biometrics

 Including braille on cards for easy identification is a crucial step for the visually impaired. This can also be used on biometrics smart cards, with sensor textures to confirm the user has selected the correct method of transacting. Not only do these cards provide convenience and inclusivity, but they also promote ultimate security by linking a person’s identity directly to their fingerprints. This data is encrypted within the card itself, reducing any concerns surrounding fraudulent behaviour or of data being lost via a centralized breach or large-scale hack.

In this context, biometrics can be used to serve the unbanked and those currently unrecognized within national infrastructures. South America is an example of an early adopter of biometrics, turning to the solution to cope with swelling population sizes, and the challenges associated with accessing proof of identity when setting up traditional bank accounts. Meanwhile in India, pension payment fraud has dropped by 47% thanks to bypassing the need for prior credit ratings or credentials.

Liveness detection, however, which ensures the biometric sensor is reading a true biometric source (rather than a false or recreated image of one), is vital to the success of financial aid programs globally. Securing remittances through biometric authentication ensures transparency and better fund control. Directing funds to cold wallets or biometrically authenticated cards can also improve program efficiency, safeguarding the interests of individuals and communities.

Overall, the biometrics market is expected to grow to US$87.4 billion by 2028, at a CAGR of 17%. Whilst its value as a simple and secure method of transacting is growing substantially, you can’t put a price on its impact on those who have so-far fallen through the gaps of finance’s digital revolution.

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Euro deep tech M&A deal value expected to reach $20bn+ in the next 15 months

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Written by Oliver Warren, Associate at DAI Magister

 

Investment in European deep tech has mirrored the broader decline in the technology sector; it has halved since the peak of 2021’s boom, reflecting investor preferences for ventures with lower capital expenditures and associated risks. Start-ups within the following verticals: Health and Bio, Transportation, Energy, and SaaS and AI experienced the most significant drops.

However, Dealroom data shows stark differences in funding for deep tech start-ups at the early, breakout (Series B & C), and late stages. After experiencing a modest deceleration between 2021 and 2022, early-stage deep-tech fundraisings have been surprisingly healthy, bucking the market trend, due in part to the hype surrounding Generative-AI and in Q1 2023 they received the highest infusion of capital for over a year.

However, this positive trend conceals a sharp decline in B and C round fundraises, which have seen investment activity plummet to $1 billion in Q1 2023 from a peak of $3 billion in Q1 2022. Late-stage rounds (>$100M) have also experienced massive declines, falling almost 70% from $2 billion in Q1 2022 to $634 million in Q1 2023.

 

$20bn+ worth of deep tech M&A in the next 15 months alone

While venture capital continues to show interest in the sector, the retreat of growth investors and the genuine prospect of a prolonged down cycle ahead has left growth-stage deep tech companies needing to implement stringent cost-cutting strategies to curtail expenses and extend their runways. But even those fortunate enough to have secured inflated funding rounds during the exuberant market conditions of 2021 will soon need additional investment.

Deep tech companies typically have high burn rates due to their heavy focus on research and development, requiring funding approximately every two years on average. With dwindling access to VC cheques, a non-existent IPO market, and practical limits to self-sufficiency, M&A is already emerging as a valid route to realising substantial profits for investors and founders, even if it doesn’t deliver the lofty $1bn+ valuations seen in 2021.

We’re already seeing more companies take this route. European deep tech M&A activity has rebounded to levels not seen for years and across our focus verticals, spanning Advanced Materials, Space, AI & ML, Cybersecurity, and Robotics, European M&A transactions have already rebounded to surpass 2020 levels (183 this year, annualised versus 176 in 2020), with some notable exits such as InstaDeep’s sale to BioNTech and SLM Solutions metal 3D printing business being acquired by Nikon.

In 2024, we forecast 250+ M&A deals in European deep tech, with at least 20 above $100m, making it the strongest M&A year since 2016. A key driver of this resurgence is the substantial increase in established deep tech companies across Europe, with many more companies fielding 100+ employees and sizeable, valuable engineering teams. The funding-driven growth in the size of European deep tech companies now makes many more sizeable, more strategic targets for international acquirers.

Overall, we anticipate the remainder of 2023 and 2024 will be banner years for European deep tech M&A, with potential deal value reaching $20 billion or more in the next 15 months alone.

 

 

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