SME Financing Options | The Definitive SME Business Financing Guide 2018

Now we will go thru the options SME owners have to finance their businesses. Businesses can either fund themselves through a variety of options, including equity or debt, with the latter being a more common practice.

Do I finance my company via Equity or Debt?

Firstly, let’s define debt financing. The borrower accepts funds from an outside source and promises to repay the principal plus interest. The interest, in this case, can be deemed as the “cost” to borrow. As for equity financing, it essentially means you sell a stake in your company to investors for immediate cash. Equity financing is costly and is not a viable option for many SMEs.

Read more: Debt Vs Equity Crowdfunding

Equity Financing

You can finance new projects by selling a stake in your company to angel investors and venture capital in exchange for cash, which then can be used for business expenses and new projects.

Angel Investors/Venture Capital

Advantage: No need for repayment
Disadvantage: You relinquish control of some parts of your company
Angel investors are individuals that are able to provide any funds in return for equity or convertible debt. Venture capital refers to institutions or firms that engage in the same activities as angel investors. Both venture capital and angel investors often value-add to companies by offering access to their own networks. However, by engaging angel investors and venture capital, you give up part of your business and you are responsible to external parties.

Debt Financing

In our guide, we list down the advantages and disadvantages of the top 5 methods of debt financing.
Ideally, debt crowdfunding is great for a single purpose over a select period of time, such as expanding into a new market. If your business has been around for a couple of years, and you have sufficient revenue and enough cash flow to make repayments, then debt crowdfunding could be for you.

Option 1. Loan from Family & Friends

Advantage: Easy & Flexible
Disadvantage: Personal relationships could be at risk

A loan like this involves getting a loan from those close to you. It’s easy, flexible and you can negotiate repayment schemes. This is the most viable and it is easily the cheapest option as friends and family are not likely to charge high interest rates. (or even charge interest at all) The biggest drawback to this option is that your professional life becomes personal. You put your personal relationships at risk if you fail to repay your loan. If you do decide on this choice, it may be wise to put the terms and conditions of this agreement on paper, even though the arrangement may be informal.

Option 2. Government-Backed SME Loans

Advantage: Longer Tenors, Lower Interest Rate
Disadvantage: Strict Eligibility Requirements, Slower Cash Disbursement, Lower Amounts

As of 1 April 2018, SME grants are provided by Enterprise Singapore, the result of the merger between International Enterprise Singapore and SPRING.
A grant acts as a vote of confidence for your business by the government. To have your grant approved by the government, it means that the government board recognizes enough potential in your business. If you have an existing grant, your creditworthiness amongst banks and other financial institutions is raised.

The main drawback of grants is, therefore, the difficulty of having your grant approved. Government grants are much tougher to obtain in comparison to accessing financing via other financial institutions as they are more stringent with the criteria. There are many grants that work on a reimbursement basis and may not be a feasible option if your project requires cash upfront.

Option 3. Bank Loans

Advantage: Longer Tenures, Lower Interest Rate
Disadvantage: Strict Eligibility Requirements, Slower Cash Disbursement, Lower Amounts

As this article highlights, banks can be reluctant to lend to SMEs. There are reasons for this: in certain market conditions, banks have a low appetite for risk. Lack of credit information on SMEs raises the cost of the credit-risk assessment. Most often, SMEs are unable to provide collateral.
This article published by DBS compares SME bank loans across three major banks in Singapore.

Option 4. Credit Advances

Advantage: Longer Tenures, Lower Rates
Disadvantage: Strict Eligibility Requirements, Slower Cash Disbursement, Lower Amounts

There are some old-fashioned alternatives to banks and government loans. You can borrow money on credit cards, take on a personal loan or take a mortgage on your home. There are varying reasons why some SME owners prefer these methods. It may be due to the urgency at which the funds are required.  However, these means of financing come with their own risks. With personal loans, you can lose all your hard-earned money. With taking out a mortgage, you can lose your home. Credit card interest is often higher than corporate loans.

Option 5. Crowdfunding and Peer-to-Peer Lending Platforms

Advantage: Flexible Repayment Option, Fast and Quick Access to funds
Disadvantage: Shorter Tenors

Crowdfunding and peer-to-peer lending are relatively new forms of alternative financing in Southeast Asia, but these are proven financing models in US, UK and China since its introduction back in 2005. Crowdfunding generally refers to the funding of a creative project or business by a number of backers via digital technology. Often, backers are given rewards as an incentive to donate.

Peer-to-peer lending is an offshoot of crowdfunding. It works by matching investors and borrowers through an online platform. Borrowers take up a loan for their business while investors who had collectively funded these loans earn interest in return.

There are great advantages to Peer-to-Peer lending – its process is comparatively easy and requires no collateral, which makes it a great alternative to bank loans. At Funding Societies, we have crowdfunded all loans. We also offer flexible, short term and customized business financing that suits your business needs.

Chapter 5: Factors to Consider When Applying for Business Loans
Chapter 6: Peer-To-Peer Loans And Why You Should Consider Them

In need of funds? Check your eligibility now!

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