4 Ideas for Financing Your Business
A decade after the global economic recession, credit remains difficult, especially for small and medium-size enterprises (SMEs). That’s because banks not only face stricter regulatory requirements now, but they also have shied away from risk. A survey by the Spanish Confederation of Guarantee Companies found that stricter requirements made it difficult for seven in 10 SMEs to get credit, although 84% of SMEs that applied for bank financing obtained it.
SMEs are problematic for banks: Large corporations and microenterprises tend to be fairly homogenous and thus straightforward for banks to assess. But SMEs are extremely diverse, making it difficult to judge their credit worthiness.
That shouldn’t dissuade you. Banks are still the major source of financing for SMEs in Spain and Portugal.
Here are some ways to get the credit you need:
- Document your credit-worthiness.
As you consider applying for credit, the Association of Financial Markets in Europe (AFME) offers the CAMPARI checklist:
—Character: Banks want to know you take repayment seriously. They will check your credit history. They want to know your involvement or stake.
—Ability: You have to show that you are able to repay. Have tax records, up-to-date social contributions, and a record of successful operation and good management. Make sure you have detailed, complete records.
—Margin of finance: You might be asked to make a down-payment, to show you’re committed to the project.
—Purpose: You need a clear business plan that includes what you intend to do with the planned investment.
—Amount: Why do you need this amount of money? Is it enough? Is it too much?
—Repayment: The lender will look for predictable cash flow, as well as forecasts of cash flow and margins.
—Insurance: This means insurance that the lender will get something if you don’t pay—collateral or a guarantee.
Usually banks don’t—or can’t—lend to new businesses. However, your bank may be able to connect you with special loan-providers or business-angel networks aimed at start-ups. Many new entrepreneurs begin by financing their business themselves until they establish a track record.
- Know what kind of credit you want.
Are you borrowing in order to expand your business? To buy equipment? To buy inventory? To enter new markets? Different purposes have different kinds of financing.
—Leasing is a good method for acquiring equipment, property or vehicles.
—Factoring is a way to get cash now for a portion of sales that you’ve invoiced—a way to deal with cash flow. However, the factoring entity takes over collections, so your customers know you’re using factoring. Invoice discounting is similar, but you continue to collect on invoices yourself. This kind of financing is usually more expensive than a traditional loan.
—Trade finance, for exports, comes in many forms, from letters of credit to international guarantees to trade loans. Mostly the point is to overcome the risk of dealing with a party in a different jurisdiction. The International Chamber of Commerce has established a set of rules for letters of credit, called UCP600, to ensure the parties are protected.
- Get a guarantee.
Bank loans with collateral or guarantees (or both) usually have the lowest interest rates. Spain and Portugal both have a system of financial intermediaries that guarantee loans for SMEs.
In Spain, a system of 18 mutual guarantee companies, known as SGRs, began in the late 1970s to reduce the risk of lending by banks and credit unions to SMEs. The guarantees help lower interest rates on loans, too. The SGRs have an industry group, CESGAR, which is a good source of information and advice. In fact, the SGRs not only reduce lending risk via guarantees, but they provide SMEs with information services, advice, financial training and business promotion, because businesses that succeed are likely to repay their loans.
In Portugal, the SPGM, after its Portuguese acronym, is the industry umbrella for mutual guarantee companies. A study of Portuguese SMEs with and without guarantees found that those working with a mutual guarantee society performed better than those without.
Other guarantees also exist: In Spain, the European Regional Development Fund provided €800 million to guarantee 50% of the amount of bank loans for 35,000 SMEs this year. More than three-fourths of the participating SMEs have fewer than 10 employees, and the average loan size is €76,000.
- Consider your options.
Banks are the main source of financing for SMEs, and often the cheapest. However, other sources of finance are developing, especially for high-growth, high-tech companies. Nonbank finance ranges from crowdfunding platforms to angel investors, venture capital and private equity. Nonbank finance makes up a lower portion of external financing in Spain—68%—and Portugal—71%—compared with France or Germany.
—MARF, or the Alternative Fixed Income Market—Mercado Alternativo de Renta Fija in Spanish—was founded in 2013 as a bond market for SMEs. Its listed instruments hit €2.4 billion last year, up 48% from 2016. There’s also an alternative stock market, the Mercado Alternative Bursatil (MAB), which has 42 listed companies, created in 2009. They might be for SMEs, but they’re for the upper end: the average bond issue on MARF is €20 million, while the minimum free float on MAB is €2 million.
—Platforms range from matching sites to crowdfunding and online auctions and marketplaces. They may be peer to peer (P2P), peer to business (P2B), or investor to business (B2B). They may be attractive to startups that are too new to qualify for bank loans. However, borrowers aren’t always vetted well, making them risky for investors.
—Government programs are available, especially for innovative companies. ENISA is the Spanish public innovation company, which finances early-stage start-ups, to help them get going until venture capital becomes interested. The Centro de Desarrollo Tecnológico Industrial (CDTI) funds research and development and innovation by business, again, to attract venture capital.
—Venture capital is young but developing quickly. Barcelona and Madrid are establishing themselves as high-tech centers. Last year, 11 investments passed €100 million in equity in Spain, with total investment volume of €4.9 billion. In Portugal, venture capital deals rose six-fold in 2016 from a year earlier. (words 1,024)
Resources in Spain:
Spanish Federation of SMEs: http://www.cepyme.es
Official Credit Insitute (Instituto de Credito Oficial): https://www.ico.es/web/ico/home
National Innovation Company (Empresa Nacional de Innovación SA): http://www.enisa.es
National Association of Mutual Guarantee Associations (CESGAR): http://www.cesgar.es
Business Angels Network Madrid: https://www.madrimasd.org/emprendedores/ban-madrid
Resources in Portugal:
Portugal Global Trade and Investment Agency: http://www.portugalglobal.pt/EN/Pages/Index.aspx
Business Innovation Society: http://www.cotecportugal.pt/pt/
LUSA PME: http://www.lusapme.pt/home-2/
Business Institute: http://www.iafe.pt