There are many SMEs financing facility options that are available for today’s businesses to tap into. So among the financing facilities for SMEs available, what is the most suitable financing for me?
I am making a large/long term purchase. (e.g. factory, office renovation, machinery, expensive office equipment)
A business loan is suitable for this type of working capital as:
- SMEs usually know the amount of funding required upfront.
- A business loan usually offers a larger sum and has a longer timeframe (usually between 1 to 5 year tenors).
- Sometimes it offers a lower rate than more flexible (short term) options.
Business loan is one of the common used for financing facilities for SMEs. However, when seeking a business loan, you need to be mindful of:
- The facility being not as flexible as a short term solution e.g. early payment fees, difficulty in topping up the loan if and when required.
- Collaterals is usually required as a security for the loan
- Longer processing time to obtain the loan
- In the event of a default, the lender may take action to seize the collateral. It will also impact on credit rating which makes it much more difficult and more expensive to obtain loans in the future.
I have been told at the last minute that I need to purchase business insurance and it costs a bomb! (unexpected expenditure)
An overdraft is the way to go to cope with unexpected expenditure when the amount and timeline is unknown. This is a very common way of financing for SMEs and is ideal for those with fluctuating financial requirements.
Overdraft facilities can be either authorised or unauthorised. An authorised overdraft facility, one of the financing facilities for SMEs, is when SMEs have an agreement with the Bank upfront. Hence they will enjoy a lower rate than the unauthorised overdraft facility.
Businesses need to be mindful that:
- Interest charges which can vary from month to month and calculated based on the overdrawn amount each day.
- In the event of a default, the lender may take action to seize the collateral. It will also impact on credit rating which makes it much more difficult and more expensive to obtain more credit facilities in the future
I have cash flow gaps between settlements by customers and operational expenses (including salary, inventory, rent )
I can’t take up a new project /new order because I do not know when my existing customers will pay me.
Invoice financing will then be one of the most suitable financing facility for SMEs in this scenario as it generates new funding by turning the accounts receivable (invoices) into immediate cash. As one of the more suitable financing facilities for SMEs available, it is commonly used for businesses that have high working capital tied up with the customers (debtors).
- It is usually very fast where funds can be drawn down within 24 hours.
- It also provides scalable funding that caters for business growth.
- No collateral required as the invoice itself acts as a security
Businesses need to be mindful that:
- Funding availability will decline as sales decline
- Not suitable for B2C businesses
I have a small business expenditure that I would like to put on credit.
A business credit card is a suitable facility for this as it caters for smaller purchases that can be paid back promptly (within 30 days)
Businesses need to be mindful that:
- Business credit cards are not suitable for larger long term purchases. This is one of the most expensive facilities.
- Merchants are charged a fee when using credit cards, where the cost can sometimes be transferred to the customers.
I am buying a new van to support my business growth, but I do not have the cash to pay up front.
Hire purchase (HP) or leasing is commonly used by businesses when acquiring assets and they do not want to cover the cost upfront. This can be used for vehicles, equipment or real estate. Businesses do not have a title over the asset which is being ‘leased’ from the lender. Once fully paid up, the ownership of the asset(s) will be transferred to the hirer. Hire purchase provides flexible repayment structures (monthly, quarterly or yearly) and very suitable for seasonal businesses.
Businesses need to bear in mind that:
- The total sum of capital repayment will be higher than the cost of the asset.
- There is an early termination charge or restriction on subleasing.
Other financing facilities for SMEs
There are also other financing facilities for SMEs, such as invoice trading and peer to peer lending. Read more here.
