Starting a business can be an expensive engagement, and so can expanding one. This holds even more true for small and medium enterprises (SMEs). The SME sector involves a wide range of businesses and hence, is very important to the economies of many countries contributing a great deal to employment and national income.
However, the directors of SMEs often complain about the lack of finance available for such entities which, in turn, stunts their growth and prevents them from fully exploiting profitable investment opportunities. This gap between the finance available to SMEs and the finance that could productively be used by them is often referred to as the ‘funding or financing gap’.
Whether it is maintaining operations or expanding into the next phase of business, proper funding is a crucial element of any effective strategy. Since SMEs don’t always require large amounts of funds, short-term financing could be a path that can lead to effective working capital management, freeing up cash, and open up many other doors for them. Below are the 5 most common ways to finance your small or medium business and move up the ladder of success.
Invoice financing uses your invoices as collateral. It is mostly employed when businesses need to resolve cash flow problems arising from unpaid invoices.
Under invoice financing, a lender advances the business a percentage of the total invoicing amount while holding the remaining percentage as collateral. While you wait to receive payments from customers, you pay a weekly fee to the lender and once the invoice is paid, the lender then returns the held percentage minus fees.
This short-term financing method is only available to companies that rely primarily on invoicing for payments and so as a result is most commonly used by B2B businesses. Invoice financing can be an excellent way to stabilize your cash flow if your business has several major customers that pay their invoices at different times.
If your business, like many others, relies heavily on a supplier to provide inventory or operational supplies, then you may be able to use trade credit as a means of short-term business financing.
Trade credit is essentially the floating time allowed the business to pay for the goods or services that they have purchased or received. It allows you to purchase goods without having to pay immediately. Instead, a promise of payment on a later date is made. If leveraged correctly, trade credit can help SMEs in managing their cash flows more efficiently and provides support in dealing with their operational finances.
A title loan is a type of secured loan that allows borrowers to use the title of their vehicles as collateral. The lending party places a lien on the car title and the borrower is to temporarily surrender the hard copy of the car title, in exchange for a loan amount. Since small businesses are usually owned by sole proprietors, the title loan can be secured against their personal car or business vehicles.
Title loans are relatively easy and quick to achieve with limited formal procedures and you can get the desired amount almost instantly in most cases. Car title loans near me will offer a quick solution when looking for emergency funding in your area.
Overdraft facilities are another great option for fighting against relatively small, short-term cash flow problems.
It is basically an extension of credit from a lending institution that is granted to a business when the account reaches zero. The overdraft essentially allows the holder of the account to continue withdrawing money even if the account has no actual funds in it or has insufficient funds to cover the amount of the withdrawal. Many banks are willing to provide profitable businesses with overdrafts, charging interest only on the money they use.
This allows SMEs to meet their current obligations during difficult liquidity periods and this even helps in keeping the business running smoothly.
Factoring is somewhat similar to invoice financing. Also called debtor financing, the concerned business sells their account receivables to a third party, referred to as the factor, at a rate that is lower than the net realizable value.
Factoring is the only source of financing that grows with the sales of your business. As sales increase, more cash becomes available for you to use, allowing you to constantly meet demand. Also, if it’s a non-recourse factor, they will assume the risk of bad debt thus, freeing up more capital.