SMEs or small to medium enterprises can avail of numerous types of financing options from term loans to invoice factoring. The following is a quick run-down of SME business finance options.
Term loans are secured loans offered by banks and other lenders. Term loans provide a lump sum of cash up front that the borrower can repay over the agreed term or period. Term loans can be repaid after one year or more and offer high borrowing amounts.
Lines of Credits
These are loans attached to a person’s bank account and provides loans up to the credit limit. The interest charged covers the amount drawn. Credit lines provide more flexibility than term loans and often do not require collateral.
In invoice factoring, the borrower sells unpaid invoices to the factoring company who takes over the collection responsibilities when the invoice is due. This is a good option for business owners who need fast cash and want an option with easier approval than traditional funding.
Merchant cash advances
Merchant cash advances are similar to term loans in that they can grant a lump sum of cash. However, instead of making a fixed payment each month from a bank account as in a term loan, the borrower makes payments by withholding a percentage of credit or debit sales or by making fixed daily or weekly withdrawals from a bank account. This is a good option for SMEs that prefer loans with unsecured financing but need the cash right away.
Personal loans are great for start-ups and new businesses with no operating histories. They may come with higher interest rates but they require no collateral. However, they are best suited for relatively stable or low-risk enterprises that have a good chance of earning enough to repay the loan, since defaults can damage the lenders’ credit score.
SME financing offers small enterprises the opportunity to get off the ground or expand operations. Whether these are loans offered by banks or alternative lenders, they each have their pros and cons that should be weighed carefully against the nature of the business and the borrower’s ability to repay.