Welcome to a new business week of making money and growing your business. Today, we shall be talking about the sources of finance open to SMEs.
SMEs are very important to the economy of any country because they contribute significantly to the provision of manufactured products for daily consumption and delivered services. They also provide jobs and create employment, thus reducing the effect of unemployment on the economy. Entrepreneurs are known to be innovative and generate new ideas, which boosts the economy of the country.
Now you might wonder how SMEs are able to access finance to set up as well as continuing to fund their businesses. Here are some of the ways an SME can raise funds:
1. PERSONAL SAVINGS AND FINANCIAL SUPPORT FROM FAMILY AND FRIENDS
The SME owner could have some money saved from a previous job or business. His family and friends could also be willing to support him especially if they see the business idea as a very good one which a high potential for success in the future. They may request for little or no proceeds from the business because their aim is not necessarily to make money but to "support their person".
2.THE ANGEL INVESTOR
An angel investor is an individual who is willing to take a risk by investing in early stage SMEs. Individuals like this are usually not easy to come by and they are very careful about the business they want to invest in. The angel investor usually gives valuable input as they desire results that are favourable to them and the business.
3. BANK FINANCE
This is money obtained by SMEs from banks in the form of loans and overdrafts. This source of income comes with the requirement to pay back with interest over a short-, medium-, or long term. Often, the SME owner would be required to put out collateral usually in the form of property of the same value with the loan being requested. This way, the bank can recover their money if the SME owner is unable to pay back his loan.
4. VENTURE CAPITALIST
A venture capitalist is an individual or company that is willing to invest in an SME to make a higher interest or profit than they would have made from other investment sources such as the stock market. The venture capitalist usually raises funds for SMEs from very big businesses that are handled by professional personnel.
So, here are four possible sources of finance for your business. Each comes with its unique pros, cons, and risk factors. The SME must understand and be willing to accept the level of risk and return for whichever type it chooses. Which of these sources do you think your SME should tap into?