For SMMEs securing funding can sometimes feel like trying to join an exclusive club where already being a part of the club is the entry requirement. You need funding – but to be awarded said funding, you need initial funding to prove your potential. This leaves a lot of South African SMMEs in a bit of a predicament, and they have no choice but to find other avenues to break into the “club” called funded businesses. This is where alternative financing solutions come into play.
So, what are Alternative Funding Solutions for SMMEs?
Alternative funding solutions are a toolbox of funding options that don’t involve the bank’s traditional funding options. These innovative tools provide flexible, tailored, and, most importantly, accessible means of financing for small businesses. Inaccessible funding is one of the main challenges faced by SMMEs.
Traditional lenders often reject SMMEs off the bat due to an inconsistent business history, evidence of financial mismanagement, tax issues, etc. Open-minded funders, like Sourcefin, use fit-for-purpose funding solutions that don’t focus on your past but on the opportunity and potential for growth in the future. Let’s explore Sourcefin’s list of Top 10 alternative funding solutions, putting you in control of your financial future.
Examples of unique funding for SMMEs
1) Purchase Order Funding (AKA Tender Funding)
Let’s say you land a big purchase order from a customer but don’t have enough cash to purchase supplies for the order. PO funding allows SMMEs to finance the fulfilment of large purchase orders or tenders secured by the purchase order itself. This enables businesses to secure financing to purchase inventory and fulfil customer purchase orders without draining their cash reserves.
2) Invoice Discounting
Invoice discounting involves getting immediate cash from a lender and using an unpaid invoice as collateral. Once your client pays you, you will pay the lender back with interest. This provides SMMEs quick access to funds, improves cash flow, and allows businesses to meet their financial obligations and invest in growth. You don’t have to wait 30, 60 and sometimes even 90 days for your invoice to be paid – access the cash you need asap with invoice discounting.
3) Embedded Lending
Talk about a game-changer for SMMEs! It’s like having a financial lifeline seamlessly integrated into your everyday business processes. Embedded lending makes it easier and more convenient to pay for things without involving another party. Whether you are using accounting software, e-commerce platforms, or other business tools, embedded lending is there, ready to provide the funding you need when you need it. For example, an e-commerce platform could look at your sales history and offer you a loan right on the platform. This accessibility and ease of use empower small businesses, allowing them to focus on what they do best: running and building their business.
4) Supplier Credit Facilities
Consider all the vendors and suppliers you work with to keep your business running. Now imagine if those suppliers offer you extended payment terms, allowing you to pay for goods and services over a more extended period. That’s exactly what supplier credit facilities do. Negotiating favourable payment terms with your suppliers can free up cash flow and keep your business moving forward.
5) Invoice Factoring
Turn your unpaid invoices into immediate cash by selling your invoice (yes, you heard right, selling your invoice). Instead of waiting for customers to pay their invoices, you can sell those invoices to a third-party company at a discount and receive cash upfront. Once your customer pays the invoice, they will pay it directly to the “factoring company”. This can be a game-changer for small businesses struggling with cash flow issues. Invoice factoring is very similar, call it a distant relative, of invoice discounting, but both serve the purpose of enabling you to avoid waiting for a well deserved payment in exchange for the great work you have done. Free the cash trapped in unpaid invoices today!
6) Working Capital Funding for SMMEs
Working capital is the amount of cash and other current assets a business has available after all its current liabilities are deducted. Current assets are things like: the money in your bank account, the stock in your storeroom, and the money you are owed by customers. Current liabilities are the things you owe like a supplier that has given you 30 days to pay. Working capital is the backbone of any business, but sometimes, it can be hard to come by. That’s where working capital funding comes in. Whether through a line of credit, an overdraft facility, or a short-term loan, working capital funding provides small businesses with the cash they need to cover day-to-day expenses and keep their operations running smoothly.
7) Supply Chain Finance
In essence, supply chain finance works as a lifeline between when you need to pay suppliers and when you receive payment from your customers. It optimises payment terms and streamlines transactions between buyers, suppliers, and financiers. It is all about optimising cash flow through your business’s supply chain. Supply chain finance can help small businesses improve their cash flow, reduce financial risk, and strengthen relationships with key stakeholders by offering suppliers early payment options or negotiating favourable payment terms with buyers. PO funding, invoice discounting, invoice factoring and, in some cases, embedded lending are examples of supply chain finance.
8) Asset Financing
Every business needs assets like equipment, machinery, and vehicles to operate. But buying these assets all at once can be expensive. That’s where asset financing comes in. Whether leasing equipment or financing a vehicle purchase, asset financing allows small businesses to acquire the necessary assets without draining their cash reserves.
9) Off Balance Sheet Funding for SMMEs
Off-balance sheet Funding allows SMMEs to access capital without impacting their balance sheet. For example, you could enter into a lease agreement to lease a space or equipment instead of taking out a traditional loan that shows up on your balance sheet. This makes your business look healthier and more attractive to investors and lenders. You get the best of both worlds – you get to grow your business without weighing down your balance sheet.
10) Merchant Cash Advance
Get a lump sum of capital in exchange for a percentage of future sales until you’ve paid off the total amount plus a fee. This can be an excellent option for businesses that need quick access to capital and don’t want to deal with the hassles of traditional lending. It’s like using future sales to grow your business today. A merchant cash advance is a really powerful form of embedded lending.
11) Inventory Financing (BONUS)
We did say 10, but who doesn’t love a little something extra? Inventory financing provides funding for products a company plans to sell, secured by a company’s inventory. It makes it easier for SMMEs to keep their shelves stocked and customers happy without worrying about running out of cash.
Why these alternative forms of funding for SMMEs are a game changer for business growth
In a world where traditional funding avenues are not always easily accessible to SMMEs, alternative funding solutions are a beacon of hope, empowering SMMEs to thrive and realise their full potential. SMMEs with great potential and growth prospects should not be restricted from realising their dream due to funding constraints. These finance solutions identify the unique funding needs of SMMEs and attempt to bridge the gap from business failure to success.
Sourcefin is a simple, straightforward route into the Funded Business Club.
We offer a simple, smart, and seamless approach to funding. Our full-service purchase order funding solution is guaranteed to wow your clients and improve your chances of getting more life-changing orders.
You don’t have to halt your business growth while waiting for invoices to be paid. With Sourcefin’s fast, innovative invoice discounting solution, you can turn your unpaid invoices into cash within 24 hours. With Sourcefin, it’s more than just funding; we will walk the journey with you to ensure your business growth. See if we’re a match by clicking here.