SME’s can be defined as having three main characteristics:
• Companies are not quoted on a stock exchange – they are “unquoted”
• Ownership of the business is typically restricted to a few individuals. Often this is a family connection between the shareholders
• Many SME’s are the means by which individuals (or small groups) effectively achieve self-employment
Why do SME’s find financing a problem?
The main problem faced by SME’s when trying to obtain funding is that of uncertainty:
• SME’s rarely have a long history or successful track record that potential investors can rely on in making an investment;
• Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk.
Sources of finance for SME’s
There are a number of potential sources of finance to meet the needs of small and growing businesses:
• Existing shareholders and directors funds (“owner financing”)
• Overdraft financing
• Trade credit
• Equity finance
• Business angel financing
• Venture capital
• Factoring and invoice discounting
• Hire purchase and leasing
• Merchant banks (medium to longer term loans
Partnership
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Loan Proposal: A written statement describing your business and its history, how you will use the loan, how the loan will be repaid, collateral you may be willing to offer and personal references.
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Personal Information: This provides business background or a resume about the owners of the business. It should also include a listing of personal assets and liabilities of the owners. The lenders may require tax returns of the owners for three years as well.
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Financial Statements: These financial statements (up to three years for an on going business) will include a balance sheet and profit picture of your business for the past three years.
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Balance Sheet last 3 fiscal years.
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Income Statement last 3 fiscal year end statements.
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Cash Flow Projections to show cash generation projection to pay back loan.
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Accounts receivable & Payable Agings: A report detailing the age of the company receivables & payables.
Venture capitalists provide equity and debt financing typically for "high technology" businesses. They normally take an ownership position or an option on ownership in the business. Venture capitalist companies seek a strong growth potential and a good (high) return on their investment within a relatively short time period usually five to seven years.
Partner Investment
If you cannot supply all the equity capital needed to finance your small business, you may have to find one or more partners willing to put money into the venture. obtain- in a partner means that ownership of the business, including its profits and liabilities, is normally shared.
In most cases, partners want a say about how the business is run. limited partners, sometimes called silent partners, can contribute financially to your business without participating in its management. Limited partners are normally only responsible to the business or its creditors in proportion to the amount they have invested in the partnership; however, parties considering a partnership agreement should seek legal vice on this and related issues.
Private Limited Company
Their services include project underwriting and debt financing, project development and equity financing for independent power producers, and financial consulting services.
The possible source of financing could be Debenture loans though venture capital loans and mortgage loans could be possible as well.