The primary resource to set up Small and Medium Enterprises (SMEs) is raising capital. Finding sources for this lifeline can be a challenge to many individuals who are all set to launch their enterprise. Though many banks and financial institutions are offering SME loans, it comes at the expense of living up to their eligibility criteria and several other terms and conditions. Also, it’s solely up to the bank’s discretion whether or not to approve a loan application.
As an alternative, there are several government-initiated programmes to support and encourage budding small and medium-scale businesses in the country. Again, these programmes include a massive hierarchy for approval and may take indefinite time before getting approved or even rejected.
When you are in a rush to complete a considerable order or do not have enough time or documents to prove your idea’s worth, you may have to think of an alternate way of funding. There are several ways of funding your business, which cannot be categorised either under bank loans or under government schemes. We categorise them under the label ‘SME Resources’.
Wondering what these ways are? Here is a list of SME resources that you can rely on:
- Merchant Cash Advance (MCA): Merchants of small and medium businesses may go through cash crunch now and then due to changing market demand. The unpredictable cash flow may result in businessmen not having enough cash to keep the inventory rotating. One way for solving this issue is the merchant cash advance mechanism, where the merchant makes an advance payment against the receivables. The advance can be repaid through daily credit/debit card settlements with small amounts paid as EMI regularly.
- Invoice Financing: Invoice financing refers to a short-term loan extended by a bank or any lending agency based on the unpaid invoice presented as proof for a business transaction. Businessmen choose this option of funding to meet short-term liquidity requirement to complete their business deal. Unpaid invoices mean that the business will receive the amount on the invoice, but at a later date.
- Accounts Receivable Financing: This method is similar to the invoice financing but at a larger scale. Accounts receivable financing (ARF) is a financing agreement, which allows the business to receive the financing that is equivalent to a part of the accounts receivable. They can be either seen as an asset sale or a loan. Here, accounts receivable is the total outstanding balance of billed invoices that are yet to be paid.
- Business Credit Score: Similar to assessing individuals, credit rating agencies assess small and medium businesses and offer a credit score. The agencies monitor the firm’s financial viability and capability to handle business obligations. The score provided offers an insight into the firm’s sales, operational, and financial composition. Hence, the risk associated with financing the firm is made visible, and the credit rating agency establishes the overall health of the firm. Obtaining a good credit score is like a recommendation letter to get a loan from a recognised lending institute.
- Business Credit Card: SME owners can now use credit cards and access instant credit for official expenses. As long as the owners are disciplined in what they are swiping the card for, SME credit cards can be a great relief when it comes to raising finances for the business. You can also keep track of the transactions made through the card at a later time. The use of cards will also reduce cash transactions and reduces the misuse of cash.
We hope that you read more about each of these methods before you try them out.