New Approaches to Financing for SMEs

Many SMEs and startup businesses rely heavily on traditional bank loans in order to fulfill their cash flow and investment needs. However, there are many ways or techniques of getting external finances other than straight debt. Some of these techniques are:

• Alternative Debt

• Asset-Based Finance

• Hybrid Instruments

• Equity Instruments

• Venture Financing

Alternative Debt

Alternative debt differs from traditional debt in that it does not involve banks. In fact, investors from capital markets provide finance to borrowing companies or businesses. To obtain funds, an SME can issue or use the following financial instruments:

• Corporate Bonds (long-term debt instruments with a fixed rate of return)

• Securitized Bonds (pooling of financial assets and converting them into debt instruments)

• Crowdfunding (funding a project by raising money from a large number of people)

Asset-based Finance

Through this technique, SMEs can get financing based on the value of its current and non-current assets including merchandise inventory, debtors or accounts receivables, equipment, machinery and real estate, instead of their own credit standing. This technique is more suitable for startups and SMEs having difficulties in getting loans from banks. Asset-based lending also provides more flexible terms and conditions than collateralized bank loans. It has been expanding in recent years, in countries with advanced financial expertise and efficient legal systems.

Hybrid Instruments

Hybrid instruments combine features of both equity and debt instruments into a single financing vehicle. These instruments are an attractive form of finance particularly for the entities undergoing restructuring, when the new opportunities and their associated risks are increasing, a strong capital structure is required but access to debt financing is limited, or the owners do not want dilution of their control by issuing equity instruments. Some most common hybrid instruments include convertible bonds, preference shares, options and warrants etc.

Equity Financing

Equity finance is used by the companies that seek long-term finance, to sustain innovation, improve value creation and business growth. This form of financing is highly relevant for companies that have a high risk and return profiles.

Venture Financing

Venture financing offers an opportunity for SMEs to raise capital and share risks. It usually comes from venture capital firms that specialize in creating a high-risk portfolio and provide a good opportunity for SMEs to share the risks and gains arising out of approved projects.

The CreditBPO Rating Report is used as a measure of an SME’s creditworthiness using financial technology and is used by lenders for quicker decision making and provision of finances. If you are an SME, our CreditBPO Rating Report® will lay the groundwork for improving your competitiveness. CreditBPO is dedicated to helping your business grow and succeed.