Risk: Return of Capital

by Adrian Davis / April 28, 2023

Welcome to Thriver’s short reads about investing in SME debt and how the SME debt market works. You’ll read them faster than you finish your cup of coffee.

Borrowing by SMEs represents $400 billion in debt that is growing at 6% a year. There are 170,000 SMEs who have at least $2 million in revenue and need money to grow further. Using investment syndicates, Thriver provides those SMEs with innovative, well-thought-out solutions with quick turnaround for funding needs of $250,000 to $1 million.

Our investors want the return OF their capital and a return ON their capital, in that order. That is, they want their money back when a facility ends even more than they want to earn a return on that money. As one investor told us, “We’re not risk averse, but we are loss averse”.

Identifying and mitigating risks to the return of capital is both a front end and ongoing process. We use a quantitative and qualitative assessment to clarify a business’s financial performance today, its obstacles to growth and key risks to the business. That assessment provides SME owners with great insights into their business. More importantly, it helps us exclude deals that put return of capital in doubt.

The prospective client is critical in this assessment. A Thriver client is a real business: a profitable business with growing revenue. The owners are smart, serious, committed businesspeople. They understand both the opportunities in the business and the risks. Those business risks are, in turn, risks to the return of capital.

If we determine that a client and opportunity are appropriate, the next step is to build a plan for that client. That plan sets out funding options, solutions to growth obstacles, milestones for the 12 months post funding and mitigants to risk.

Once funding is in place, Thriver continues to work with its clients, building relationships and mitigating risks. Because we deal with growing businesses, clients frequently seek to increase the size of their facility over time. We work with our clients on growth plans up to our $1 million limit. At each stage we make the same initial assessment of risks to return of capital and, where we increase a facility, work closely with clients to mitigate those risks.

After return of capital, comes return on capital. How investors can make money from SME debt is the subject of our next newsletter.

by Adrian Davis / April 28, 2023