The Fundamentals of SME Lending

Deciding when and how to get a business loan can be a daunting process. The good news is that it doesn’t have to be needlessly complicated. Before you get started, it is wise to know what options are available for you and what is required from your end. Read our guide on business loans to find how to compare business loans and take away the guesswork.

Why are SMEs important?

Your business has an important role to play. A SME, or small to medium enterprise, is defined by the number of employees and often the turnover or balance sheet total. The European Union sets 250 employees as the upper limit of what constitutes a medium-sized company, whereas the United States includes those up to 500 employees. Typically, a small enterprise within this definition would be a company that has less than 50 employees.

With that in mind, according to the European Commission: “In 2015, enterprises employing fewer than 250 persons represented 99% of all enterprises in the EU” of which, around 94% are independent enterprises, which are not controlled by or controlling another enterprise.

Similar statistics can be found in many countries – it is no wonder that your business truly makes the world go around. Yet, one of the biggest factors stifling growth is the difficulty in accessing needed finance and securing safe business loans.

Why take a business loan?

Maybe you are ready to ramp up your growth plan or you need working capital. There are many reasons why an inflow of cash can be helpful for your business. For example, if you need to hire new employees but don’t have the cash at hand or you need to purchase equipment or inventory – an injection of capital might just be out of reach.

Acquiring new assets doesn’t come for free, but it is an important decision to take that next step. Small or medium companies of all types can benefit from working capital or equipment financing, whether you are in construction, real estate, delivery service, retail, or even the cleaning sector.

Assess your eligibility for a business loan

Now that you know a business loan would be a good option for your company, you should take stock of important factors that influence what kind of loans you may be eligible for. Is your business still in the idea stage? Are you ready to grow your start-up or has your company been established for many years?

Assets are a consideration when finding out whether it is possible to get a secured loan (one backed by assets) or an unsecured loan, which will not require assets but instead uses other criteria such as financial health and turnover.

Along those lines, some SME loans can offer more flexibility meaning that factors such as the time the company has been in business, revenue and credit scores are weighed in heavily. That can lighten the load of needed collateral or even make you eligible for an unsecured loan.

Traditional bank business loans

The first place many SMEs go to look into getting a loan is at a bank. However, these days getting a loan from a traditional bank is more difficult due to stricter lending policies. Banks are a reliable source for money, but the process can be tedious with lots of paperwork, interviews and multiple in-person visits.

Many factors can influence your eligibility for a loan of any type including credit history, how long you have been in business, history with the bank itself and other financial health indicators.

Small business funding and grants

As discussed, small and medium businesses are considered an important part of economies all over the world. That means that many institutions are trying to do their part to help SMEs access the financing they need.

Much of this financial support comes in the form of grants or other funding programmes. These financing opportunities are provided by local or regional government actors and institutions that are set up to support SMEs. The plus side is that, if you are eligible, these can be a great way to kickstart your business or carry out related research or a business innovation project.

Like bank loans, these require meeting strict criteria and providing a lot of paperwork. What’s more, these business financing options are not necessarily available for just any business. These programmes are often directed to specific industries or areas like agriculture, technology or the environment.

Compare business loan alternatives

Perhaps you don’t have the information or time needed to get a loan from a traditional bank or are not eligible for governmental small business funding. Luckily, there are other options from classic loans and cash advances to credit lines.

Both banks and specialist business lenders offer different types of business loans that can have a payback period ranging from months to years, depending on the lending company and your financial needs. Many business loans require some type of collateral, but there are many ways to account for this. For example, asset-based financing will secure the loan with company assets or a cash flow loan will factor in expected cash flow.

A similar type of loan is invoice financing. This is an option that means unpaid invoices (such as from your customers) will be factored into the bigger financial picture. The downside of invoice financing is that once the outstanding invoice is paid, the lender will often claim a percentage of this money on top of other expenses for the service.

Another option is a “quick money” solution. Merchant cash advances are not loans, as such, but an option for companies with bad credit scores that can qualify based on future credit card sales. Although these advances tend to be the easiest to get, it is worthwhile to pay attention to the terms to find out how much you will be paying for this service.

Similarly, you can use a small loan to get fast cash. But with all the options for business loans available, it is wise to consider a loan that is catered to a business rather than consumer finance.

Online business loans

Online lenders are plentiful in today’s age. Instead of shifting through piles of paperwork in person, more streamlined application processes and quicker transaction times are becoming more and more possible.

As with any important financial decision, do your research and read the small print to find out which is best for your business. A well-established online lender for businesses can make your life easier and provide a loan tailored to your business needs .

Business loan interest rates

Business loan interest rates are a necessary aspect of any loan, you know the saying: Money doesn’t grow on trees. The main distinction is whether it is a fixed interest loan, which is static, or a variable interest loan that can fluctuate based on various factors.

If the business loan interest rate is on the high side, it is important that you plan and follow through with paying it back in a timely manner. Otherwise, you will be paying more than you had hoped for and face possible additional fees. Good planning is a great way to ensure that you are paying within the desired range.

Additional fees are also possible with loans, such as a transfer fees or processing fees that should be factored in when considering which loan is right for you. Above all, remember that late payments can create additional costs and problems down the line.

What are you waiting for? Get that boost you need for your business. Contact our reliable financial advisor to find out how to get the most out of a business loan that is tailored to your needs.