Getting SME finance for starting a business, especially in these difficult economic times, is tough but need not be impossible.
By: Hitesh Khan/
The process of getting SME finance for starting a business, or financing a business, will serve to make sure that your business idea is a good one. If you can get financing that means that somebody has confidence that you will succeed and is betting money that you will.
Generally, the higher cost your business startup, the faster you should see a return on your investment. Take into account interest expense when calculating your return.
There are also low cost businesses with a great deal of potential. The person who can start his own business with very little money and perhaps no outside financing will usually invest “sweat equity” into the business instead of financial equity. This means that a low cost business may take longer to produce results. In the long run, however, if it has enough potential, it may be the right business for those that have few financial assets.
Getting SME Finance for Starting a Business–Start with Your Money First
Getting SME finance for starting a business is one of the thorniest parts of starting a business.
The first key is to save money so that you can put your own personal savings into the business. Nobody is going to want to invest in your business if you do not invest in your business yourself.
It is difficult enough to get a loan with a business startup and next to impossible if you don’t invest in your own business. When finding funds, remember that lenders want a track record and you may have none. Live frugally and save money so you can show potential lenders that you are committed to your business.
The Importance of the Business Plan
Before finding funds from outside sources for starting a business, make sure you have completed the entire business plan. The business plan template is your road map. It will tell you how much money you need, when you will need it, and when you expect to pay it back. Potential lenders will want that information and you should want it also. You should always prepare a business plan before asking anybody for money.
Understanding the Language of Business Financing
There are several business terms you should understand in order to make good decisions on getting money for starting a business:
A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
A secured loan is a loan in which the borrower pledges some asset (e.g. a property, jewellery) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral. In the event that the borrower defaults the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower.
Unsecured loans are monetary loans that are not secured against the borrower’s assets.
Collateral means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay. The amount of collateral determines how much lenders will lend.
Personal guarantee is a promise made by an entrepreneur to repay the company debts in the event of default by the business. If the business doesn’t have enough assets to pay the debts, the owner has to pay out of his personal assets. A personal guarantee tells the bank that the business owner is serious about his business and about repaying his debts. When the owner is unable to cover the debts personally, the bank will start to seize personal assets. In a startup situation it is virtually impossible to borrow money from a bank and not give the bank a personal guarantee.
Getting SME finance for startup or small business will be the biggest challenge for most successful entrepreneurs. Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.
It is good practice for the entrepreneur to speak to a loan consultant if there are constrains with restricted funds in growing the business. Loan consultants have very wide network with financial institutions and are very often more mindful of the different financial instruments which are available in the market out there. They can guide the businesses to the product which is the best fit for them.
Mr Paul Ho, chief mortgage consultant at iCompareLoan, said: “Most importantly, remember that you need to borrow when you don’t need the money, because when you really need it, no one will probably lend you any.”