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Sources of finances for SMEs
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Nov 03, 2022

4 Common Sources of Finance for Small Businesses

With people realizing that they can earn more from running a business than having a regular job, many are trying to set up a small business or startup company. A major concern of these budding entrepreneurs is financing. 

A business requires capital, and sometimes, this is what holds back its growth. Fortunately, various types of financing can help them. If you are one of these business-minded individuals looking for sources of finance for small business, then this article will help you.


Sources of Finance for Small Business


1. Equity Financing


One of the sources of finance for entrepreneurs is equity financing. Equity financing is giving others shares or a portion of ownership of a company in exchange for financing. The investing party then gets a share of the business’ profits.

Equity financing is different from loans, as the business does not have to repay money to the investors. Instead, the investors get a certain percentage of the profits depending on the amount they invested or other conditions agreed upon. Some investors may hold key positions in the business or take part in the decision-making process.

A disadvantage, though, is a possible conflict caused by investors meddling with your business. Such is normal as they want to ensure that their money will not go to waste. This is something businesses should anticipate and manage if they want to get help through equity financing. Below are some sources of funds in the Philippines for your business.

Friends and Family

Small businesses can get equity financing from people who know them like family and friends. For Filipinos with close ties to their families, this is common. 

However, just because they are family or friends does not mean that formalities will be set aside. As much as possible, come up with a contract that all parties can agree with to avoid conflicts later on.

Venture capital

Venture capitalists are companies that invest in smaller businesses that they see have the potential to grow. They rely on the companies’ business model or product to see whether investing will be worth it. 

If you are confident about your business’ potential to grow, you may look for a venture capitalist to invest in it.

Angel investors

An angel investor is an institution whose goal is to help small businesses, knowing that it will have a great impact on the economic development of a certain demographic or geographic area.

Though their mission is to help, angel investors will still look at a company’s profitability before investing. They have fewer demands than venture capitalists, but they can only provide a smaller financing amount.

Equity and Initial Public Offerings

Even big businesses may still require additional funding to grow, so they offer shares or stocks to the public through equity and initial public offerings.

Equity financing is ideal for small businesses that may not have established a solid credit history to get financing from banks. But what this requires is a great network of people willing to invest in your venture. 


2. Debt financing


Another source of finance for small businesses is debt financing. As the name suggests, debt financing is getting help by borrowing money. Unlike in equity financing, lenders do not require part ownership or control of your company when you borrow money from them. Below are some of the possible sources of loans and credits for your business.

Family and friends

Just like in equity financing, you can approach family or friends to ask them for financial assistance for your small business. The terms are often flexible in this case, and you may not be required to show proof of your capacity to pay, as your good relationship, aside from their trust in your business, is enough.

Even though the money will come from your kin or friend, an agreement must always be present to avoid relationship issues in the future.

Loans

When it comes to loans, small businesses have various options. Banks often come to mind when speaking of loans. However, many small businesses find it hard to borrow from banks because of their strict requirements. If they have assets of value, they can use them as collateral for easier loan approval. 

For starting businesses who may find it hard to borrow from banks, they can avail themselves of personal loans or take advantage of their credit cards limit if they have one. There are also non-bank financial institutions that can be sources of business loans.

Bond issues

This is not always for small businesses, but some can get financing through bond certificates. A business entity can issue bonds to individuals or entities who want to invest in the business. These investors receive interest payments periodically and eventually get the investment back, depending on the terms agreed upon.

Debt financing is recommended if you have a good credit rating that allows you to borrow money from institutions. However, you have to ensure that you have enough cash flow to pay back your loans to avoid defaulting or the inability to pay back, as this has consequences.


3. Lease Financing


In lease financing, a lessor agrees to grant business ownership of assets for a specific period in exchange for payment. By the end of the lease period, the asset is returned to the lessor or can be transferred to the lessee depending on the agreement.

Types of Lease Financing: Finance and Operating

There are two types of lease agreements: finance and operating. 

A finance lease is when a lessor allows the use of an asset in exchange for periodic payments for a long period. Eventually, the ownership of the asset is transferred to the lessee. This is similar to a loan contract. 

An operating lease, meanwhile, is short term, and ownership of the asset remains with the lessor. It is similar to a rental agreement.

Lease financing is ideal for businesses that may not be able to acquire assets necessary for business. However, this is often costlier than other types of financing.


4. Revenue-based financing


Revenue-based financing is when a business borrows money from investors with the agreement to pay them back through portions of its future revenue. This is ideal for startup businesses that cannot secure financing from banks or venture capitalists. However, the amount of money from this financing is often low, and you must also ensure profit to pay back your investors regularly.


Also read: The Perfect Loan to Scale Your Business


 


Which one is the best for your business?


You have to assess your capability to pay back carefully to find out which one, among the business capital loans in the Philippines, is suitable for you. For small and medium enterprises, it is ideal to avail of debt financing from institutions specifically for them, like Esquire Financing Inc. or EFI. EFI offers business loans with flexible terms, no collateral, and minimal requirements. EFI checks the cash flow of a business to determine the loan amount and terms, so you can avoid missing your loan payments. Any business can borrow up to P10 million as long as all documents are in order and if your cash flow allows it. If you want to fuel your dreams, start by applying for a business loan at EFI.