Although small and midsize enterprises (SMEs) are considered the backbone of business and a key source of economic growth and dynamism, they often have difficulty getting financing to expand, innovate and provide jobs.
There are many reasons for this. SMEs, start-ups and solopreneurships typically lack a long business history and track record of success. In addition, they usually do not have a large asset base to serve as collateral for loans, they often operate in high-risk industries, and they tend to show volatile patterns of growth and earnings.
Seed money to start a business generally comes from personal funds or from friends and family.
However, financing needs evolve as a business grows, and the funding sources used at the start-up stage of development are not the same as those used by established firms that have built up equity and collateral. The range of options for financing small and midsize businesses includes:
• Owners’ personal savings, credit cards and lines of credit
• Loans or investments from friends and relatives
• Trade credit from suppliers
• Government loans and grants
• Loans from employees
• Retained earnings
• Business angel financing
• Venture capital
• Bank loans and lines of credit
• Commercial credit cards
• Factoring and invoice discounting
• Equity financing
Increasingly, business angels – such as investors who provide risk capital in return for a stake in the company – are a key link in the financing chain for SMEs, as they bring business experience as well as capital to the table.