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Home»Finance»Top 5 Loans Small and Growing Businesses Need to Know About
Loans Small and Growing Businesses
Finance

Top 5 Loans Small and Growing Businesses Need to Know About

By Tomer JackJanuary 4, 2024Updated:January 4, 2024No Comments4 Mins Read
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One reason why SMEs fail to access the funds they need for sustenance and growth is that they are unaware of the many financing options they have at their disposal today. This includes lending products such as asset-based loans, cash-flow lending and invoice factoring, which can also extend to factoring government contracts.

This includes lending products such as asset-based loans, cash-flow lending,

Yet, for many, it’s still either a bank loan or nothing. 

But with banks preferring to give loans to bigger businesses with large balance sheets, many are stuck in cash flow problems. 

Though getting the funds they need to start is difficult, acquiring the ones they need to sustain and grow their operations can even be a greater challenge for SMEs. It is no wonder then that 50% of them fail in the first five years and 70% in the first 10.

Therefore, it is imperative that SMEs expand their horizon and consider other financing options out there. 

In this article, we will highlight some of the popular financing options that SMEs can use to access the funds they need. 

Asset-based lending

This is a loan given by a bank or other financial institution based on the value of the assets in a business’s balance sheet. In this system, the tangible assets of the company serve as collateral. In the case of defaults, such assets can be sold to repay the loan. 

Asset-based loans are typically sought by SMEs to finance their growth and expansion. However, because many of them don’t have large assets on their balance sheet, they might find it difficult to qualify for such loans. Or they might have to settle for smaller amounts based on the market value of their assets.  

Cash-flow lending

With cash-flow lending, financial institutions lend funds to SMEs based on the past, present, and future cash flow of the business.

The quality of the business’s revenue and cash flow gives the lender the assurance that it has the capacity to repay the loan. Therefore, the value of its non-cash tangible assets are irrelevant. 

For added security, cash-flow lenders may consider the credit rating of the business – which is a summary of its creditworthiness – and use it as a determinant of the amount to loan the company. 

Compared to asset-based lending, this is more accessible to SMEs, who are more likely to have consistent cash flow than a large balance sheet. However, the funds they can access with cash-flow lending might not be as large as asset-based lending.  

Invoice factoring

Invoice factoring is a process where financial institutions, including merchant cash advance companies, buy the sales invoices of SMEs, pay them cash for the invoices (minus a factoring fee), and take on the responsibility of getting the cash from the business’s customers.

This method is useful for SMEs that generate revenue quite well but have high accounts receivables (AR) days and can’t convert revenue earned to cash quick enough to meet their operational expenses.  

Unsecured loans

This is a loan that does not require security/collateral. The lenders are content with giving the loan as long as the borrower has a good credit rating and history. 

The downside is that such loans come with higher interest rates (when compared to secured, asset-based lending) and the lender might not be willing to give as much as it would have given if there was a collateral.  

Crowdfunding

Crowdfunding is the pooling of small funds from a number of individuals to finance a business venture. 

There are many companies that facilitate the crowdfunding process, connecting businesses who need funds with a pool of individuals who are ready and willing to lend. 

Though crowdfunding is more popular with new ventures, SMEs who have been in business can also use it to support and develop their businesses.

Conclusion

Once an SME knows the variety of options available for funding, it then needs to select the one best suited to its unique business.

A company like Duckfund can collect important information about your business (including by investigating your supply chain) and provide the best financing option for you. 

Applying for a loan on Duckfund is simple and easy. And once your application is successful, they will provide you with funds within 24 hours at affordable interest rates (without asking for your FICO score).

Sustaining a business can be very hard. But with access to the right finance at the right time, you will be in a better position to both sustain and grow your business.   

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