23 July 2018

RSS Feed

Maximizing the Value of Financing for SMEs

E-mail Print PDF

Financing of SMEs plays a major role in boosting our economy as these small and medium enterprises are the ones that create new jobs and add innovation to the economic growth. Since they do not have direct access to capital in the global markets, they look up to reliable sources that would fund for them at low costs. When SMEs rely on an outside source for their finances, it becomes very important to know the different options that are available and the one that will provide the highest value.

Furthermore, lenders decide whether they should finance the business or not depending upon the nature of business. For example, restaurants, shops and other small retail firms with a low credit profile are considered to be risky businesses and hence, are denied funds. Such businesses are usually funded by merchant cash advance providers. Merchant Cash Advance (MCA) is an advance provided to the SME based on its future revenues. This is done by evaluating their everyday credit card receipts and determining whether the business can repay the amount on time. However, in this kind of funding, the repayment and advance amount coming in depends directly upon the daily business. So when the business is slow, the advance amount flowing in from the merchant, as well as the repayment amount falls relatively. In order to avoid getting into such a situation, it is best that the SMEs build a strong credit profile and get their finances funded by a stable source. This article will cover ways in which SMEs can maximize the value of financing and make the most of it.

Ways to Get Maximum Benefit from the Financing Sources

1. Current Credit Profile

Maintaining a good credit profile/credit rating for your business is extremely important in order to have better financing options in hand. Most lenders decide whether to grant finance or not, depending on the SME’s credit profile. This is because a weak credit profile will include negative listings that imply that the business has not been going well and it may not be able to repay debts in a timely manner. On the other hand, when your credit profile has positive listings, you will be open to better and secure financing options. It is also important for SMEs to regularly check their clients’ credit profiles, in order to make sure that they make payments on time and your business is not at risk. Therefore, understanding your credit profile and ways in which it can be improved, will help you stay ahead among the other SMEs.

Some ways to improve your business credit profile:

  • Monitor your credit profile regularly and check for any legal filings, payment history, delinquent taxes, etc.
  • Keep track of your business credit behaviour that includes payment history (records of the banks, utilities, suppliers, business credit cards, etc.) and public records (company information that can be found elsewhere and include tax reporting status, business license, tax liens, property ownership, etc.). For a good credit profile, your credit behaviour should have more of current accounts/positive listings and less/zero defaults or payment delays. As you regularly check your credit behaviour, you will automatically focus on making timely payments and staying out of any legal issues, thus improving your credit profile gradually, but substantially.
  • Even if there are negative accounts, make sure to continually add positive accounts so that eventually, you will have more positives when compared to negatives.

2. Know Your Loan Purpose

Are you in need of funds for your business? If yes, you should first list out the things that you need money for. Knowing the purpose for borrowing money helps you figure out the right type of financing that your business needs and makes your search easier. Some of the common reasons why SMEs borrow loan would include, inventory purchase, starting a new marketing initiative, bridging a slow-business-season gap (and making repayments at once), purchasing of equipment and fixtures, etc. Once you have listed out your requirements, you can determine whether it should be a long-term or short-term loan based on the possible expenses, ROI, current cash flows and other factors. With your loan purpose in place, you can also have a clear picture of the total capital that is actually required.

3. Determine the Total Amount You Need

It is always good to have a clear picture of the total capital you really need for your business. It also helps to build credibility and trust with your lender. Being a wise SME, you should also understand that if you need a particular amount of loan and you still borrow double the amount, it can burden you with a high debt and in turn affect the ROI. Therefore, know your financial needs and take wise decisions when borrowing money. If at all things don’t go as planned, have a plan B and assure your lender that they will receive payments on time, regardless of the situation.

4. Understand All the Terms of the Loan

As a business, when you apply for a loan, make sure you have read and understood all the terms attached to it. Apart from the interest rate, you should also learn about other loan terms such as the total payment amount, frequency of periodic payments, date of payments, total capital cost plus additional fees, etc. You should know that the frequency of payments differs from one lender to another. While some lenders still go with monthly payment schedules, some others prefer daily or weekly payments that will be debited from your account automatically as per the pre-decided payment schedule. Be well aware of all these terms and conditions so that you can be prepared and make timely payments without fail.


The above points are the key ways in which you can improve your business credit profile, in order to get the best financing options and make the most of the capital borrowed. You can also get your business credit rating improved with the help of a credit rating agency. Credit rating agencies study and assess your business’s financial achievability, risks and other factors, thus setting a benchmark of your firm’s performance amongst the other firms.

Last Updated ( Thursday, 08 March 2018 13:44 )  

Get the Flash Player to see this player.

Follow SEI

Facebook Twitter Linkedin Youtube RSS Feed
Small Enterprise India Newsletters


Take Our Online PollVoice your opinion
What do you expect from the StartUp India Action Plan?

Stock Market