Six New financing approaches for SMEs
Could you be an entrepreneur planning to venture in small- to mid-size enterprises (SMEs) in the USA? That’s a bold move you made! But not a very new one. There are 30.2 million SMEs in the USA, translating to 99.9% of all the business.
Again, despite the massive number of SMEs, there are some hard facts you should know. Fact one is that America records 20%, 50%, and 70% collapse of SMEs by the end of their first year, fifth year, and tenth year consecutively. The main reason for the collapse is the inability to raise capital to meet the cost of operations.
Fact two is that business owners are still stuck in traditional financing options, yet there are better new alternatives. There are varied specific new approaches for use, comprising of Asset-Based Finance, Alternative Debt “Hybrid” Instruments, and crowd financing. We elucidate more about these alternatives that can help you start and successfully manage your SME.
Asset-Based Finance
Asset-based finance comprises of:
Purchase-order finance,
Warehouse receipts,
Leasing, factoring,
Asset-based lending
Asset-Based financing entails the approaches where firms obtain funding basing on the value of their assets. It is slightly varied from traditional funding options since it does not rely on the firm’s credit standings.
Both the term loans and Working capital are fully secured through the firm’s assets. Some of the most common firms’ assets which can serve as securities include:
Inventory
Real estate
Machinery
Trade accounts receivable
Equipment
The advantage of asset financing lies in the ability to access necessary funds faster than any other lending options. As opposed to consideration of future cash flow prospects and balance sheet positions in other lending options, asset financing is a conventional bank loan.
However, a lot is required when it comes to accessing Asset-based finance. Both in terms of costs and complexity of the process. Mandatory requirements to access this form of funding include:
Asset appraisal
Auditing
Monitoring
Up-front legal costs
Such incurrences might directly hamper the firm’s return on capital. For that is deemed as a low return financing option. But gauging it from an overall perspective, it is an option worth trying.
Alternative debt
Alternative debt is a form of modern financing option for investors. It is mainly characterized by the ability to secure funding from the capital market rather than the usual Bank sectors. Therefore, it is a collection of all the direct and indirect tools for collecting finances from the capital market.
Mostly direct tools comprise of raising funds from capital investors. On the other hand, indirect tools include covered bonds and securitized debts.
SMEs access the bank loan extension, supported by a banking institution’s activities in the capital market. Honestly, some of these instruments have been used for the long term, but differently.
The method is therefore not entirely new, but it is an innovation of the same old alternative. Nonetheless, it has had minimal integration in SMEs. Yet it is a low-risk financing alternative that should be adopted. If at all, there is the need to get sufficient capital.
Alternative financing options include:
Corporate Bonds
Securitinised Debt
Covered Bonds
Private Placements
Crowdfunding
Instead of seeking finances from specialized institutions or groups of persons, it is possible to raise enough capital from various audiences. Some critical elements of the target in such financing are business angels, venture capitalists, and banks. The process of getting funds from large groups is Crowdfunding. Crowdfunding is interchangeably used with “crowdsourcing” in the business realm.
In case you did not know, Statista shows that the USA had 15.5 billion U.S. dollars funds for capital from fundraising during the second quarter of the 2019 financial sector. Such a substantial amount can be sufficient to cater for the operation of multiple SMEs. Implying that you can be able to raise enough or even more than, from the crowdfunding
method is rather old but has been creatively improved in the modern era. Most crowdsourcing is done through online platforms, including social media groups and fun pages. Traditionally, the method needed specialized contractor employees to help with crowdsourcing at a fee. But the internet seems to have eroded the culture and made it more affordable ad completely hustle free.
Aside from the finances, the method comes with intrinsic and extrinsic motivations necessary to operate a business in a community. Intrinsic motivation is characterized by the pleasure of undertaking the task while extrinsic comprise of career benefits, dissatisfaction, monetary rewards, or learning.
Hybrid instruments
Often, Hybrid instruments are used to imply pure equity or debt from an entrepreneur or rather an investor. The equity granted as capital is expected to accrue profits after investment. So that higher returns expected by the investor can be realized in the long run. It is a high-risk form of financing.