- September 15, 2020
- Posted by: avantconsulting
- Category: Uncategorized
When it comes to business, it is needless to say that capital is required, and financing can be tricky at times. Especially when the economic outlook is bleak, it poses some difficulties for businesses. Business loans are not at all foreign to Small and Medium Enterprises (SMEs). At some point in time, you would most likely apply for a business loan for financing purposes. However, banks may have stricter regulations in approving loans so SMEs may find it difficult to raise funds. Hence, we have compiled the alternative funding solutions.
- Peer-to-peer (P2P) lending
P2P lending, also known as crowdfunding, is an option for businesses. Unlike a bank loan, borrowers and lenders are often connected via an online lending platform. Therefore, businesses that require funding can be matched to potential lenders. The more common P2P lending platforms in Singapore include Funding Societies, Validus and Minterest.
- Finance leasing
This is commonly adopted by sellers. It is the idea of using someone else’s money to make a profit and subsequently using that to make a loan repayment. There are 2 main types of finance leasing – direct finance leasing and sale-leaseback.
For direct finance leasing, it is an arrangement where the lessor leases their assets (e.g. equipment) with the aim of profiting from the interest payments made by the lessee. When interest repayment has been fully paid for, the lessor can transfer the ownership of the asset to the lessee and terminate the lease. Alternatively, the lessor can choose to retain its ownership too.
For a sale-leaseback arrangement, the lessee sells the asset to the lessor and then leases it back from the lessor. When the lease term ends, the asset would return to the lessee. So why do companies do that? Why don’t they just keep the asset? Well, the advantage of sale-leaseback is the access to cash flows without affecting the company’s operations.
Finance leasing is also great because it is a off-balance sheet financing method, meaning it is not reflected under the liabilities portion of the company’s balance sheet.
- Project financing
It is a way to have your business project completed while safeguarding the company’s assets. This is a loan structure that is primarily relies backed by the company’s assets and project’s cash flow. This is attractive to the private sectors as companies can fund projects off-balance sheet. On top of that, such financing method is usually for large-scale and long-term projects. Hence, it would be more commonly adopted for infrastructural projects like the construction of buildings, train tracks and power plants.
- Supply chain financing
This is a method that improves the efficiency of transactions across different parties. It is how businesses have a longer window period to make their payment to their suppliers while allowing their suppliers to get paid early. It provides short term credit that optimizes working capital for both buyers and sellers.
However, this method may not be suitable for all. It works well if you as the buyer has a better credit rating than the seller. With a better credit rating, you are more likely to be able to source funds from banks or financial institutions. With this, it sets you at a better position to negotiate with the seller and you can try to fight for better trading terms such as – longer payment period.
- Invoice financing or factoring
It is a way for companies to borrow using invoices that are owed by their customers. This would be a good short-term financing option, especially for SMEs. Generally, lenders would finance up to 70%-90% of the total invoices. Such financing method poses less risk to lenders as the invoices signals payment by customers in the future. Hence, it is expected that the amount would be paid back.