Raising capital for your small or medium sized enterprise is difficult. While there are a number of different forms of capital, many banks and lenders around the world refuse to lend to small and medium size enterprises because they’re considered too risky.
SME lending, which we’ll define as lending that’s been tailored for smaller business sizes, is an excellent way for small businesses to get the funding they need without having their credit risk negatively affect their decision.
The start-up process is a complex one and requires a number of steps. Because it’s been used in the banking sector for some time it has become quite good at this. The problem with using the current system for small businesses, however, is that most banks only use one tool or method for funding SMEs and once they’ve been funded most banks underwrite them to just see how they perform. This means that lenders are stuck with the business without being able to guide it along a better course for future growth.
It’s no wonder then, that without specialist advice most small businesses don’t have an excellent chance of getting the funding they desperately need without negatively affecting their credit score.
A great new funding method for SMEs is starting to grow in popularity all around the world. This method is often called invoice financing and it’s a type of lending that’s designed specifically for small business owners who are looking to get the funding they need to start up, grow, or purchase new equipment.
It’s called invoice financing because it essentially allows a borrower to use invoices as collateral and then to secure an advance against those invoices at a much lower cost than what has traditionally been available. The borrower does this by selling an invoice from his or her business before that invoice has been paid. By selling the invoice, the borrower can ensure that he or she has collateral in place before borrowing the funds from a specific lender and then using those funds for a specific purpose.
This is a far better option than conventional bank financing because it’s an alternative way of getting capital to small businesses that doesn’t negatively affect their credit score.
In addition to lending by invoice, other options are available including: small business loans, corporate financing, equipment leasing, and equity investment. The advantage of each of these forms of funding is that they provide different options for your business and each fits into your unique situation differently.
Depending on your situation you may be able to use more than one option at once. This is called debt stacking and it’s a great way for small businesses to get the funding they need without having to take out several forms of loans that they may not need.
You could, for instance, get a small business loan to pay for your startup costs and then utilize an invoice financing solution to help you get the funding you need when you sell your first batch of products. Over time, as your business grows, you could then switch over from traditional invoicing methods and banking solutions to invoice financing alternatives that provide more steady but lower-interest long term capital. This option can be great because it helps keep your credit score high while providing steady growth potential.
