How Can Short-term SME Loans Benefit Your Business?

Short-term SME loans have maturity of one year or less, making it a short-term commitment for businesses. The availability of short-term debt financing allows SMEs to obtain faster approval compared to traditional lending where the process can be long with tedious documentation, delaying the required funds.

To operate smoothly, SMEs often require short-term startup loans from debt providers instead of long-term debt financing. Loans with tenure ranging from 3 months to 12 months provides SMEs the flexibility to get in and out of financing quickly without tying up their credit limit. Short-term business loans are also potentially more cost-effective despite having a higher interest rate due to the shorter repayment schedule where less interest is incurred by the business.

A survey by Electronic Transactions Association claims that more than half of business owners would choose a loan with shorter tenure to minimize total fees and expenses when facing a short-term ROI opportunity. Besides, short-term SME loans can act as a cushion when your business experience fluctuations in revenue or when an emergency occurs. This prevents startups from facing financial distress, especially when COVID-19 disrupted the operations of many businesses.

Short-term loans can be utilized in many ways, with the following being the common reasons startups seek for short-term debt funding:

1. To Raise Working Capital

Working capital is the heart of a business. It ensures the business can function day-to-day. A short-term SME loan covers temporary deficiencies in funds. This includes expenses such as payroll, marketing fees and payments on short-term debt. To fuel business growth, investment in expenses that drive growth such as advertising and marketing are essential. Loans can help cover expenses and provide a buffer, allowing the business to serve customers without compensating for growth.  

2. To Bridge a Financing Gap

Bridge loans are short-term loans provided to startups until they secure a permanent financing. The process of equity fundraising via venture capital and high net-worth individuals, or angel investors is often long and complicated. This often leads to delay and affects the cash flow of startups in need of capital injection. With a short-term bridge loan, the startup can continue its daily operations and meet its short-term obligations while waiting to receive money raised from equity financing.

3. To Pay for Inventory

Some businesses require large amount of funds upfront to pay its suppliers to produce goods, but end customers usually have lengthy payment terms for the product. Businesses often face cash flow problems when they must raise substantial funds within the company to procure the product for sale. Payment terms can range from 30 days to 120 days, making the need for a purchase order financing from debt providers. These loans are usually provided to businesses by a single disbursement followed by a bullet repayment upon the maturity date when the business receives money from customers, making it a quick and hassle-free process.

4. To Improve Terms on a Larger Loan

Credit history plays a crucial role in a lender’s decision-making process when SMEs seek for financing. Lenders are more comfortable to provide financing to startups with good repayment history. Good credit conduct increases their confidence in the startup’s ability to repay. Businesses without credit history also tend to obtain loans with less ideal terms. Often, they secure loans with high interest rates and processing fees that will affect the company’s profitability. When startups establish a good relationship with lenders and repay their loans promptly, better terms are offered by their lender. This is especially useful when they require loans with larger quantum in the future.

Concluding Remarks

Usually, short-term loans have zero collateral if your business has a great credit score. It is also coupled with speedy approvals and flexible repayment terms based on the needs of your business. You can also read up on how to increase your chances of obtaining a loan here.

Interested to have a chat with us on the opportunities available? Kindly reach out to us at [email protected] or contact us for a chat!

Venture Debt/ Venture Lending as a Complement to Equity Financing

Venture Debt vs Venture Capital, which is better?

Are you ready to bring your startup to the next level? Are you thinking of raising from Venture Capitals (VCs) or Venture Debts (VDs)?

We can all agree that money is one of the most significant factors in a SME’s success. In fact, according to an article written by Forbes, one of the most common reasons behind why businesses fail is the lack of capital or funding. Today, SMEs have more financing alternatives than the traditional equity financing from venture capitals.

Equity Financing

Equity financing involves selling a portion of the startup in return for capital. For example, when Firm A wants to raise capital for its operations and expansion overseas, the owner decides to sell its 15% ownership to a group of investors in return for capital. The investor now owns 15% of the company whereas the owner owns 85%. Although the owner has no obligation to repay the investor, there are downsides to this. In future equity financing rounds, the owner would have to give up more of its company and share profits with its investors.

Venture Debt Financing

Venture debt financing can be an alternative or complement to equity financing as it prevents dilution of the owners and its existing investors equity stake. Besides, collateral is not required as startups have yet achieved positive cash flows to obtain conventional loans from traditional financial institutions. Instead, lenders are sometimes compensated with the company’s warrants. 

Venture Debt as a Complement to Equity Financing

Let us take a deeper dive into venture debt as a complement to equity financing.

Typically, startups take on venture debt after an equity raise. This increases the total amount raised without diluting more equity owned by entrepreneurs and investors. Besides, this extends the cash runway of startups which promotes confidence in its stakeholders. With so much uncertainty surrounding us it also acts as a buffer for what can go wrong, for instance, cancelled contracts and projects from clients.

However, many early-stage startups rarely consider debt financing as a funding source because of the following misconceptions:

  • Debt funding for startups is too expensive
  • Debt funding from venture debt lenders should be last resort
  • Early-stage startups are unable to obtain startup loans due to poor cash flow and poor business credit score
  • Debt funding for startups is bad for profit

Some also think venture debt is synonymous with convertible debt/ convertible notes. The latter can be converted into equity, but such rights are not attached to a venture debt. This is optimum for founders that want to avoid painful dilution. Debt has been hard wired in us as a ‘bad thing’ but think about the possibilities you can unravel. A short-term debt facility could allow you to fuel your startup’s growth with little equity dilution; or increase your cash runway to achieve the next milestone.

Whether you want to take on venture debt or venture capital, there are many flexible options out there. Here at Lyte Finance, we provide customizable debt structures for your startup. Speak to us by reaching out at [email protected]

Spending Your Business Loan Effectively

Are you thinking of scaling up your business with a business loan?

Do you require a working capital loan to purchase more inventory?

Would you like to expand your marketing strategy to improve sales?

These are main reasons why business owners take up working capital loans from traditional banks, peers and families, P2P platforms, government institutions etc. Be sure to talk to multiple financiers/ debt providers to compare the rates provided. There could be large discrepancies which could ultimately affect the profitability of your business. 

Now, imagine that everything went as planned with the working capital loan approved. How do you ensure your business loan is spent effectively, generating the greatest returns for your business?

Build a Safety Net with your Business Loan

Allocate a portion of the business loan received as emergency funds. With looming uncertainties surrounding the business ecosystem, this safety net could act as a buffer during an emergency, or it could contribute to your bank balance which increases the likelihood of you getting an approval when you apply for working capital loans. Debt providers would feel more assured when the bank balance is sufficient as it shows your business provides them with the confidence that repayments could be done.  

Set Up Automatic Loan Repayments

Late or missed repayments are costly, adversely affecting your business credit score. An auto-debit helps manage your business loan repayment by saving your time and preventing late charges, improving efficiency, making it a win-win situation!

Tranching of Funds

It is common for businesses to seek for a loan quantum that is larger than what’s required. To them, this eases the application process which can be tedious and time consuming. Speak to your debt provider to see if they can provide working capital loans in tranches. This allows you to drawdown multiple times, saving your business expenditure on interest payments.

Conduct Budgeting Before Applying for a Business Loan

It is essential to calculate monetary needs and set appropriate budgets prior to business loan applications. This is especially important when it comes to working capital requirements. SMEs often struggle to plan with their limited resources. Besides, SMEs overlooking business priorities can also bring detrimental consequences. Budgeting provides the business owner a clearer perspective on cash flow, reducing costs, and improving business profitability. 

Utilize your Free Cash

As your business scales with positive returns, your bank balance will increase. Depending on the business’s future prospect, it could be ideal to retire some loans. However, keep in mind some financial institutions would impose charges on early payment. Conduct a cost benefit analysis before making such decisions.

Overall, acquiring a business loan can be financially beneficial for your business. It allows your business operations to run smoothly, especially during times of financial strain. It is also essential to always ensure your business has a healthy credit score to increase the probability of obtaining financing.  Click here to find out how your credit score helps you raise working capital and manage risk.

For more information, do reach out to us at [email protected] for a chat!