The Limits of Traditional Finance Models

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The leaders of small and midsize businesses (SMBs) can have it tough when it comes to working with finance providers, both in terms of services and transactions. The primary reason for this is that working with any of these models has its own form of “price of entry” that creates a hurdle for the business owner or leader.

Here are four reasons why these models can make it tough for the businesses they aim to serve.

Rigid Engagement Frameworks. You have to know what you want before you might want it. Further, there is often a limit to how much flexibility a service or capital provider can exhibit in working with you. This means you have already vetted your own options and preferences and that you are willing to engage in the matter in which the service provider engages, not only upfront but on an ongoing basis. Flexibility is not the hallmark of these models, putting the onus on SMB leader to be educated and have it figured out beforehand.

Natural Conflicts Around Transactions and Fees. The business model of finance service and capital providers creates natural conflicts which can cloud the going-in advice you are given. This can limit the value of a sounding board for the SMB leader to assess options, if the firm sitting across from the table is directly incentivized for you to engage/transact, and to do so now. Further, certain expertise is walled off behind a transaction conflict (such as investors) – without taking their capital first, they can’t help you. Again, the onus is on the SMB leader to have already determined the course, when those across the table might be the best ones to help you through those critical decisions.

Single Resource Inefficiencies. Many service providers offer access to “a guy or gal”, most often in consulting firms or fractional executive offerings. This results in process and cost inefficiency. Regarding process, if your guy or gal gets hit by a bus, what happens to your capabilities? In the absence of defined methodologies and replicate-able processes, businesses are subject to similar turnover risk as if they hired a single employee. On the cost side, the challenge is two-fold. If you get a single resource from a larger firm, you are paying more than the direct value of that resource to compensate the larger firm and there is always a question as to what value the larger firm is adding beyond access to that resource. Separately, engaging a single expert to provide a spectrum of services and capabilities naturally means that part of the time spent is on lower-value activities. An example is hiring a part-time or fractional CFO who spends a good chunk of his/her time cranking spreadsheets (an Analyst or Associate activity).

Upstream Talent Suck. Size matters in finance. So many of the traditional finance models earn fees based on asset or transaction size, or in the case of advisory, the size of the company served. Naturally, this has an impact on talent flow, as that percentage of a much bigger number or the higher hourly rate to the client flows through to the team’s compensation pool. Smaller businesses can thus feel shut out from the talent they need to make the best decisions and execute effectively.

The conclusion is not that traditional models are bad. The conclusion is that they are limited. Pay the price of entry….or don’t enter.

We have forged a better path with Relational Finance. The initial point of engagement isn’t forced into the same mechanism of the traditional models, giving SMBs a partner to dig into options and collaboratively plot the path forward. Further, the economics are aligned with the objectives, which can shift over time as the realities of life and business play out. Plus, we’ve got talent. We make up for the lack of those higher rates or asset bases by going longer and deeper into relationships – if you have five years instead of five weeks to make your money, you don’t need to max out on the front end.

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