Many business owners believe the most crucial factor in success is sales. While it is obviously true that without sufficient sales a business will fail, maintaining liquidity, or having access to sufficient cash is equally important. Even the most successful businesses experience fluctuations in revenue, causing disruption to cash flow. Having fast and easy access to funding in these instances is crucial. Without it, not only will daily operations be impacted but the organization will be unable to take advantage of new opportunities.
The latest guide in our Business High Five series, The SME Guide to Business Funding, explains why access to working capital is crucial for all SMEs, as well as where and how to apply for funding.
Some of the important questions our guide answers include:
Where can SMEs access business funding?
If you search for a “business loan” online, you’ll be confronted by a staggering number of results: 1.5 billion, to be exact. And though banks still dominate as finance sources for SMEs, the International Finance Corporation (IFC) finds other loan providers have started to appeal to owners who are searching for fast, easy ways to access finance.
The three main ways one can access funding are:
- Traditional Banks
- Government Funding
- Fintech Lenders
How to choose a responsible business funding partner?
Ultimately, responsible lending means putting the customer first. Businesses turn to a variety of sources for funding. The problem is there are some lenders out there that don’t act in the customer’s best interests. It is important to select a funder who believes in responsible lending. This means ensuring affordability, transparency of terms and conditions, and supporting the customer when needed.
Do you know what your credit score is? Understanding your own and your business’s creditworthiness is a great practice in general. But it’s especially important if you’re planning to take out a loan as lenders will base their decisions, at least in part, on your credit rating.
Other important factors used by lenders are:
- Trading history (how long has your business been operating)
- Annual revenue
- The collateral you are able to provide
When considering funding, it’s important to consider the way in which you want to access capital, as well as the repayment terms. There are two broad business funding options available to SMEs.
Fixed-Term loans are the most common type of business funding, a fixed-term loan is a lump sum amount that is repaid over a fixed period of time, typically up to 10 years (depending on the size), and at an agreed interest rate.
A Credit Facility is a fast-growing alternative to fixed-term loan. Simply put, a credit facility offers instant access to a line of credit. A business can withdraw up to a pre-approved amount without needing to reapply.