There are various options for working capital finance available for today’s SMEs. In this article, we will explore more on business loans and invoice finance and how it should be utilised by SMEs.
It is normal for businesses, even successful ones to seek loans which are usually offered by traditional lenders (i.e. Banks). Securing a bank loan is usually a long tedious process which can take up to several weeks. The Bank’s eligibility criteria are stringent and businesses usually need to have:
- Minimum of 2 years in operation
- Satisfactory collateral, business and/or personal assets
- Long credit history to assist in the credit assessment
SMEs also should take into cognizance of the following:
- Business loan’s interest rate for small businesses can be quite high
- Often the approved loan amount is insufficient to meet the SMEs’ needs
- Long contract locked in, i.e. 12, 18, 24 months
- After subjecting the organisation through weeks of a painstaking application process, and surmounting all the above requirements, there is no guarantee that the loan application will be approved. Banks usually have their own risk profile, so they may still reject the application if they determine that it does not fit their risk appetite at that juncture. Or the Banks may just reject the application as they have met their loan target or quota.
Once the loan is approved, the SME is usually locked into the loan facility for at least 12 months. Very often the SME may not necessary need the loan for such a long duration or the whole duration thus incurring unnecessary fees when the loan facility is not being utilised. For example, a quick cash injection is required for a new contract or a new order where the SME only needs a bridging finance for only a 30 or 60 days duration.
Thus if the SME is seeking invoice financing for relief to cover for only a short period of time, then a business loan will not be a suitable product.
A more suitable solution for short term finance would be Invoice Finance, allowing SMEs to turn invoices into working capital instead of adding more liabilities into the company’s balance sheet. Rather than being locked into a long term funding contract with Banks, SMEs can utilise their outstanding invoices to obtain working capital. By selecting the appropriate invoices in terms of amounts and due dates the SMEs can fine tune and secure just the right funding they need.
The processing of invoice discounting application is generally much simpler and swifter than the business loans application. It does not require further collateral other than the invoice itself. The simpler application process will free up the SMEs’ resources which is much needed to focus on growing the business. Click here to find out more whether invoice finance is suitable for your business.