Proven SME Financing Methods

SME Financing could be a thorn under the skin of most entrepreneurs. What other means can an SME utilize to fund its business? That’s what has been begging the question of where SMEs are. Here, I have listed alternative means to finance your business.

Venture capitalists as you may know can be a good source for providing funding, networking, and directives to launch your firm. Angel investors, on the other hand, do not ask for company shares or want to become part of your firm’s stakeholders. If your business is for science and research, it may receive grants from the government, supporting international, and national bodies.

This article has been developed solely for SMEs seeking alternative routes to traditional bank loans. You might have been planning on starting a business while financing it might be your nightmare. That’s all we know about business. But, it’s rewarding when we finally launch our firm and are able to meet its financial obligations. Financing is a very crucial aspect if your firm is to survive and expand.

Read: 3 Best Ways To Face Your Fears In Business

Financing an SME is a difficult task for most entrepreneurs, and a lack o financial support makes it much more difficult. There have been no quicker and easier means to get business loans and plying the route of the traditional banks will require we reach some credit score before we would be considered.

Proven SME Financing Methods
Proven SME Financing Methods

What if you low credit score with these lenders, and have no collateral to offer? You must think out of the box to solve. Here, and in subsequent articles, I have listed and discussed some alternative funding options for SMEs.

Why it’s difficult getting loans from banks or SME Financing for your SME?

Difficulty in raising capital. It is difficult for SMEs to raise capital thereby, jeopardizing their ability to be granted loans by banks. Banks are not against SMEs when it comes to giving loans, but, they’re concerned about their ability to pay back in due course, and failure to pay, they should be able to provide adequate collateral to cover the loan expended.

This difficulty of raising capital has deteriorated because most SMEs are startups and some banks will request to see healthy financial statements of the firm ranging from 5 years period or their tax data before loans could be offered to them.

Read: Digital Goods As Store Of Value

At this, let’s observe the alternative to business financing. Alternative financing is simply any other available method SMEs employ to obtain loans without going to banks. Why do SMEs seek loans?

Common Reasons Why An SME Could Seek A Loan

Here is the most common reason why SMEs could seek loans:

1) Lower Credit Requirements: It is a proven fact that banks will decline to give loans to low credit score customers and startup SMEs seeking loans.

2) Qualification Criteria: Most SMEs are not qualified to receive a loan from most banks, therefore, they seek alternative means that require lower measures for credit worthy before granting the loan.

3) Faster Disbursement: Alternative loans are quick to grant and disburse loans to SMEs than traditional banks.SME financing alternatives. It is not a new thing if a new venture seeks a loan. It’s usual and common practice everywhere. And, local banks’ requirements have been a big stigma to SMEs, therefore, I have developed this article to aid you to make the right choice for your firm.

Community Development Finance Institutions

There are hundreds of nonprofit community development finance institutions in the country today providing loans to SMEs at a reasonable interest rate as stated by Jennifer Sporzynski, senior vice president for business and workforce development at Coastal Enterprises Inc. (CEI).

Proven SME Financing Methods
Proven SME Financing Methods

“A wide variety of applications for loans come across our desk every week, many of them from ambitious startups,” Sporzynski said. “As a mission-oriented non-bank lender, we know from experience that many viable small businesses struggle to access the capital they need to get started, thrive, and grow.”CEI lending style is not much different from that of the banks. But, as banks look to credit scores before granting a loan, CEI does that, but, in a different manner.

“We look for borrowers who have been fiscally responsible, but we understand that unfortunate things happen to good people and businesses,” Sporzynski said. “We seek to understand what happened and assess its relevance.

Types Of SME Loans

According to CreditMantri, SME Loans are of two types –

  1. Secured Loans – where the banks need you to submit substantial collateral or guarantee. The rate of interest on these loans is lower.
  2. Unsecured or Collateral free loans – where the loan is processed based on a healthy existing relationship with the bank or the profitability of the business. The rate of interest on these loans is relatively higher.

However, once the bank has approved the loan, it is disbursed in various forms as follows:

  • Initial capital in the form of term loan or demand loan;
  • Working Capital in the form of cash credit, overdraft etc;
  • Overdrafts based on Bills of Purchase;
  • Export credit facilities;
  • Bank Guarantees;
  • Foreign or Inland letter of credit.

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