Introduction: As the global economy faces the aftermath of the Covid-19 pandemic and grapples with rising energy costs, surging inflation, and potential recession, small and medium enterprises (SMEs) find themselves confronted with a series of challenges. Many have come to refer to it as the “cost of running a business crisis.” In these trying times, access to business finance becomes crucial for SMEs, whether it be through credit cards, business loans, or alternative funding methods.
Necessity of Business Finance for SMEs: A recent exclusive survey conducted by NerdWallet, involving 500 senior SME decision-makers, highlights the paramount importance of business finance in the current economic landscape. Shockingly, one-third of the respondents (33%) emphasized that access to business finance will be vital for their survival in the coming six months. Equally concerning, 31% stated that their organizations are currently not financially stable, and 32% admitted to having no financial plan in place to sustain their operations over the next 12 months.
Challenges in Accessing Business Finance: Despite the evident need for financial support, SMEs are facing challenges in securing funds. Among the surveyed decision-makers and managers, nearly a third (31%) had applied for some form of business finance since the beginning of 2022. However, an alarming 20% of these applicants had their requests rejected, even with a ‘good or excellent’ business credit score. Moreover, 41% of SME decision-makers expressed that business finance is now less accessible compared to the previous year.
Exploring Available Forms of Business Finance: Given the increased difficulty in accessing traditional finance options, 30% of respondents have turned to explore alternative funding methods to finance their operations. Here are some of the available options:
- Business Loans: Business loans remain the most familiar and widely used form of business finance. They involve borrowing a lump sum and repaying it with interest over time, typically in monthly installments. Additionally, SMEs may explore government business loans, such as the extended Recovery Loan Scheme, to help navigate challenging times.
- Business Credit Cards: For short-term financing needs, SMEs can consider applying for business credit cards. However, it is essential to manage credit card usage responsibly, as high interest rates can lead to financial strain.
- Business Overdraft: Those with a business bank account can opt for an overdraft to handle unexpected expenses that exceed the available account balance. Regularly maintaining overdraft repayments is crucial to avoid excessive charges.
- Asset Financing: Asset financing provides options to either fund the purchase or leasing of equipment (hire purchase) or unlock the value of existing assets (asset refinance). Maintaining timely payments is vital to prevent losing access to essential business assets.
- Invoice Financing: For businesses that issue invoices, invoice financing offers the opportunity to borrow a percentage of pending customer invoices (minus discounts and service charges). The responsibility of invoice collection varies based on whether you choose invoice discounting or factoring.
- Merchant Cash Advance: SMEs that receive regular customer debit and credit card payments can benefit from merchant cash advances. With this form of funding, a fixed percentage of future customer card payments is used to repay the borrowed amount.
- Business Grants: SMEs should not overlook the potential availability of small business grants that are offered on national, regional, and local levels. These grants can be targeted at specific groups and provide valuable financial support without repayment obligations.
Conclusion: In the face of economic challenges, access to business finance has become a lifeline for many SMEs striving to survive and thrive. Although obstacles exist, exploring a diverse range of finance options can help SMEs secure the necessary funds to weather the storm. As SMEs continue their journey towards recovery and growth, understanding and utilizing these funding opportunities wisely will be key to their success.
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