SME Finance with Ease

SME finance is key to the growth of a small business, an economy and a nation. Know the fundamentals and sure processes to financing small and medium enterprises.

SME finance is the financing of small and medium sized enterprises where the capital needs of firms are supplied, costed, priced and acquired. Capital for it is supplied from the business finance market via bank loans, overdrafts, credit lines; leasing and hire purchase agreements; equity/corporate bonds, private equity or venture capital and even factoring and invoice discounting.

Some of the financing utilized include internally supplied measures that include own earnings and or informally as trade credit which can also include delays in the paying of purchases of goods and services.

Importance

The importance of financing small and medium enterprises is significant in the growing of economies and nations, yet even today it is well underserved in terms of direct finance and therefore the dearth of it has caused much need for the know-how of achieving it.

Some of the key processes of achieving such financing include:

  • Collateral based lending offered by traditional banks and finance companies usually made up of a combination of asset-based finance, contribution based finance, and factoring based finance, using reliable debtors or contracts.
  • Information based lending usually incorporates financial statement lending, credit scoring, and relationship lending.

  • Viability based financing is especially associated with venture capital.
  • Reliable for the entire small ticket loan.

 The Gap

Majority of the SME sector has insufficient security needed for collateral based bank lending nor established high company returns that attract venture capitalists and other risk investors. Further, some markets and firms have deficient information minimizing the effectiveness of financial statement-based lending and credit scoring. This has resulted in the so called “SME finance gap” especially in emerging economies. As a result, firms falling in this category have become termed as Small Growing Businesses (SGBs).

To this end, there now are at least two distinct approaches to overcoming this finance Gap. The first being an effort to utilize an external party to provide the collateral or guarantees required. Although this approach tends to be difficult and rather unsustainable, it is available and known as the Meso-finance sector.

General market data has shown that there hasn’t been significant obstacles in the supply of bank or private equity finance to qualified SME applicants. The challenge has therefore been more on the demand side of the business finance market in the form of:

  • Lack of satisfactory business plans, accounting and other information;
  • Inadequate assets for use as security; and,
  • Insufficiently high levels of profitability, gearing, liquidity, stability, and other business-financial performance criteria on the part of funding applicants.

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How to Invest Money Secured > Foreign Direct Investment > SME Finance