Business Financing For SMEs
Small and Medium Enterprises, or SMEs, play a massive role in the economy, particularly in developing countries. SMEs account for most of the small to medium businesses in a local area and are one of the most significant contributors to job creation.
Not only that, but they make up 90% of businesses worldwide, as well as contributing 50% of employment all over the world. In short, SMEs are essential to the economy and the people depending on that economy.
What is an SME?
It's generally accepted that an SME is something bigger than business that serve as a vehicle for the self-employment of their owner. Equally, an SME is unlikely to be a part of the stock exchange because of its size.
Usually, they are owned solely by an individual or a group. It's also possible that the group of people can be a single-family running their family business. SMEs don't have a single type of business. It can be any business, as the term itself refers to the size.
Any small to medium business, like a small bakery, shop, store, etc., can be called an SME. That said, if you're looking to build a small business yourself, then there are several business financing that can help SMEs such as your startup take off.
Any startup can obtain funding, from family funding to venture capitalists, through proper research and some luck. Here are some sources a business owner might want to look into.
Let's talk about the obvious thing here. If a startup doesn't need that much funding, then one thing it can do is fund the business itself.
This is what we call bootstrapping, which means their business funding will be coming from the owner’s pockets, which can come from their savings or even equity from their house. .
Family and Friends
This is potentially a very good source of financing since they may accept a low return because their crucial motivation is not purely financial. That said, the business owner will accept goodwill from them, probably in return for small favors in the future. However, it doesn't go without any disadvantages.
Money is usually the primary source of conflict, so unless the business owner is on good terms and has a written contract for the deal, then it shouldn't be a problem in the future. Also, the funding might be too limited or insufficient for the startup.
Business angels, also known as angel investors or simply angels, are high-net-worth individuals looking to fund a small startup to help it take off.
Usually, funding a startup can be a considerable risk, but since these angels are not in it for the money, they are more willing to take the risk and fund the startup in exchange for some equity.
Not only that they are also willing to offer out loans. These loans work like regular CreditNinja online loans that you can get from traditional banks and lenders. Also, they will usually grant the entrepreneur something more than monetary value. For example, they also offer properties like office spaces and apartment buildings.
That said, once the business has taken off and can stand on its own, the angel would then get their money back and put their equity back in the hands of the owner.
Angel investors are quite rare, but once an angel investor is interested in a startup idea, they will be very helpful. A lot of them fund SMEs and help them thrive in their communities.
Equipment, properties, and vehicles are essential for SMEs, depending on what kind of business they are running. Luckily, a business owner can lease equipment and other properties instead of outright buying them.
Leasing itself is not a source of financing for SMEs, but it's an excellent alternative if a business owner can't fund their capital cost. The only disadvantage is that it is not possible in all aspects of the business. Leasing is only possible for tangible assets like cars, machines, office spaces, etc.
Venture capitalists are often subsidiaries of a bigger company that has been given cash holdings to invest in smaller businesses, usually SMEs. However, most of them are too niched and only looking for SMEs in line with their industry.
For example, nowadays, venture capitalists are more interested in a business that deals with technology, like computer engineering, IT, etc. For an SME to attract venture capitalists funding, they also need to have an aggressive high return.
SMEs make up most of the economy in a country, not to mention the community's primary source of job creation. However, obtaining financing can be very challenging. So, we’ve discussed some sources of business financing that business owners can opt for if they want to start their businesses.
With these sources of business financing, we hope that more SMEs will be created in the near future.