Small businesses are the backbone of the global economy. According to the United Nations, micro, small, and medium-sized enterprises (MSMEs) make up 90% of worldwide business, provide 70% of jobs, and generate 50% of global GDP. This makes them a critical engine of growth and innovation.
Isabelle Durant, Acting Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), spoke on April 20 at the seventh Empretec Global Summit online. She stated that support for MSMEs from policymakers worldwide should include the extension of debt financing and financial inclusion.
Indeed, larger financial institutions often exclude MSMEs and prefer to work with large multinational corporations (MNCs). For instance, getting a business loan in Singapore can be difficult for small businesses. That is why a legal money lender in Singapore has chosen to specifically provide loans to help small businesses grow in the island state.
Small businesses need to understand the financing options available to fuel the growth engine. This article will provide an overview of the different financing methods that small businesses can explore, as well as the pros and cons of each one. Small business owners can then choose the one that best suits their needs.
Equity Financing
Equity financing is when a business raises capital by selling ownership stakes to investors. The main advantage of this type of financing is that it does not require the company to repay the raised money. This frees up cash flow, which can be used to grow the business.
The main disadvantage of equity financing is that it dilutes the company’s ownership. This means that the founders and original shareholders will own a smaller percentage of the company after the infusion of new capital because they will be diluted by the new shares issued to the investors.
Venture Capital
Venture capital is when a business raises money by selling equity stakes to investors. This is similar to equity financing, except that private equity investors favor already stable enterprises, even if they are small. On the other hand, venture capitalists look for small startups that show excellent potential for growth.
The main advantage of venture capital is that it can provide a large amount of money to fund growth. The main disadvantage is that, like private equity financing, it dilutes ownership and gives the investors a say in how the company is run. In addition, venture capitalists typically want a seat on the board of directors. They may push for changes that they think will maximize their return on investment, even if it is not in the company’s best interests.
Small Business Loans
Small business loans are typically provided by banks and other financial institutions. The main advantage of this type of financing is that it does not dilute ownership. The business owners can retain complete control of the company because they do not have to give up ownership stakes.
The main disadvantage of debt financing is that the business will have to repay the loan with interest. This can strain cash flow, especially if the business is not doing well. Lenders usually require collateral, such as property or equipment, to secure the loan. The business will be unable to get a loan if it does not own assets that can be used as collateral. If it has assets that are used as collateral, these are at risk of being lost if the business is unable to pay the loan.
There are legitimate lenders, however, that provide low-interest loans to small businesses. They may also provide both secured and unsecured loans, meaning loans without collateral. In addition, the terms of the loan can be negotiated so that the repayment schedule is manageable for the borrower. If the loan is repaid in full earlier than its due date, the remainder of the interest need not be paid. In certain cases, the company even does not charge interest if the loan is paid within 14 days. It is best for small businesses to seek out lenders like this.
Asset-Based Lending
Asset-based lending is a type of financing that uses the company’s assets, such as accounts receivable and inventory, as collateral. The main advantage of asset-based lending is that it can provide financing to companies that may not be able to get a loan from a bank or other financial institution.
The main disadvantage of asset-based lending is that it can be expensive. The interest rates are typically higher than those of bank loans, and the fees can be high. In addition, the loan agreement may give the lender certain rights, such as the right to take over the company if it defaults on the loan.
Finance Builds Success
Small businesses have several financing options available to them, each with its own advantages and disadvantages. In order to make the best decision for their business, small business owners should carefully weigh the pros and cons of each option and choose the one that is most appropriate for their needs.
