What are Some of the Prospective Sources of Funding for an SME?

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The Small and Medium Scale Enterprises (SMEs) are on the rise and there is a myriad of funding options available for these industries and business organizations. As these are the potential sectors of the growth of the economy of any country, these are highly looked upon. To promote the set-up, establishment, functioning, production, marketing, and various other activities; the SMEs get ample funding from various reliable sources. Some of this includes:

  • The Close Ones: The first and the foremost source of the provision of the required fund for the establishment of any small or middle-scale enterprise is the owner himself/herself. Such close funds might also come from the close ones like friends or family members. These are considered to be great prospective resources of the required funds. The reason is that the investors, in this case, might accept a lower value of return, unlike several other investors. This is due to the fact that the main objective of the people who fund in their own organization are not driven entirely by the financial motives. There are several other factors which lead to the funding of the SME which might be emotional and sentimental as well.
  • An Affluent Individual: The wealthy individuals are usually referred to as the “business angels”; and these are ready to invest in a particular SME for some sort of benefit. However, there is a drawback in this mode of funding as it is very difficult to spot such individuals. Moreover, such ‘business angels’ are highly specific about the investment they are going to make as they analyze the risk factors very carefully.
  • Credit Supply: The SMEs can avail the trade credits from their suppliers. This form of funding is quite common, yet of a shorter term. In some cases, when the suppliers are big names and established companies, they might, however, extend the deadline.
  • Discounts Over Invoice and Factoring: This is a famous technique of obtaining the funds by an SME. It involves the raising of funds against some security. This could be in the form of the outstanding or excellent receivables. This is also the short-term funding option and is generally considered more expensive than the overdraft method.
  • Provision of Finance by Bank: There are many banks who might give the funds as an overdraft on a long-term basis. Such fundings or lending of the overdraft is secured by means of important assets like buildings, papers, or lands. As it might be difficult to raise the long-term funds, the SMEs also opt for the medium-term fund options to remain at par.
  • Financing through the Supply Chain: This is a recent trend in the funding industry which aims to follow the movement of value as it flows through the supply chain. In case of SCF (Supply Chain Financing), the buyer is benefited greatly than the seller.

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