SME Financing: Your Essential Guide

Regardless if it’s used to purchase inventory, invest in infrastructure, or keep operations running, access to capital is without doubt crucial to any business.

Primarily, a business has two options when looking for funding—bringing in investors or getting an SME loan.

While both alternatives have their own strengths, most entrepreneurs prefer the latter.

This is not actually surprising.

Getting an SME loan can give you the luxury to run your business according to how you see fit sans outside intervention.

Also, depending on the SME loan you take out, in most cases, terms can be set based on your expected receivables.

And that’s just for starters.

If you are in the process of getting a business loan, below are some of the options available at your disposal.Image result for SME Financing: Your Essential Guide

Short-Term Loans

Instead of monthly payments, short-term loans are due (in full) at the end of the term agreed upon.

Short-term loans are typically used for business needs that are short-term in nature—complete minor projects that can bring in quick returns, raise money for cash receivables, and purchase additional inventory, among other things.

These types of loans are considered ideal if you are engaged in a business that is seasonal in nature.

Short-term loans are often provided by credit unions and banks.

Lines of Credit

Rather than receive a lump sum, getting a line of credit will give you access to funds you can use whenever the need arises.

In some ways, it is similar to using a credit card.

While the fees and compounded interests can be high, credit lines are considered beneficial when you experience income shortfalls.

Long-Term Loans

Considered one of the most common loans provided by large commercial lenders, long-term loans are usually used for business refinancing, acquisition, or expansion.

Typically, these type of loans are likely to come with lower interest rates compared to short-term loans.

Long-term loans are relatively easy to obtain if you have a well-established business or if you are a new business with a robust growth plan.

Alternative Financing

If you are looking for non-bank lending products, it is reassuring to know you have a long list of options to choose from.

Cash advances, peer-to-peer loans, crowdfunding, leasebacks, and asset-based loans are just few of the choices available.

Money obtained from alternative financing are used for a variety of reasons ranging from filling in cash shortfalls to financing minor expansions.

However, compared to bank loans, these loans are typically smaller and often come with higher interest rates.

Once you figure out the loan option that will best suit your needs, consider it vital to develop a plan to help maximize your chances of getting the nod.

The following helpful tips should get your planning off to a superb start:

  • Accurately identify likely sources of both existing and requested funds and be clear about how they will be used.
  • Be ready to show proof of positive cash flow by having current business audits as well as financial statements handy. Showing proof of positive cash flow is vital as it would help showcase your ability to settle your obligations fully and promptly.
  • Make it a point to have an idea of the value of your business. Simply put, the value of your business is the amount a buyer would willingly pay at a particular time.The valuation is sometimes used by creditors to gauge the amount they are willing to lend at a given interest rate.In most cases, lenders would also want to have an idea of the value of the business in case of a loan default.

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