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Finance for SMEs

Finance for SMEs. Sources of Finance for Small Business “Alternative Finance”. Who needs financing and why Where do companies go first Where do companies go next What can new companies expect What alternatives exist. Overview. What is an SME

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Finance for SMEs

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  1. Finance for SMEs Sources of Finance for Small Business “Alternative Finance”

  2. Who needs financing and why • Where do companies go first • Where do companies go next • What can new companies expect • What alternatives exist Overview

  3. What is an SME • No single universally accepted definition of a small or medium sized enterprise • Generally based on turnover, number of its employees, borrowings • or a combination thereof

  4. Where do you go first? • The banks • Your savings / retirement funds / house • Friends / family / “fools” • Asset sales • Non bank financial institutions Source: CPA Australia Asia Pac Small business survey 2010 Initial Financing

  5. Limited funding options • Compared with large companies, smaller businesses tend to make greater use of debt funding • And less use of equity funding

  6. The good old days? • From the late 1990s till 2007...small businesses generally had sufficient access to bank finance. • Unlikely to be a swift return to the conditions prior to the GFC • Such conditions probably were unsustainable across all sectors of the economy

  7. Bank loans harder to get • Fallout from GFC changed the risk profile of most businesses • Banks undertook to mitigate their risks with a review their loan portfolios • Many businesses were required to agree to changed loan conditions.

  8. Competition • Australian banking customers are currently served by a wide range of providers • 12 Australian-owned banks; 9 foreign-owned bank subsidiaries; 35 foreign bank branches • 11 building societies • more than 100 credit unions • Moves to strengthen the mutual sector to promote competition

  9. Business Plan • Sources of Repayment • Company Balance Sheet • Company Income Statement • Personal Statement of Net Worth • Personal and company tax returns • ASSETS and ability to repay What Are Banks Looking For?

  10. Non bank financial institutions What are NBFIs ? • No banking license or not supervised • NBFIs facilitate bank-related financial services, such as investment, contractual savings, and market brokering • Examples of these include insurance firms, pawn shops, currency exchanges, and microloan providers

  11. In addition to banks / non bank financial institutions: • Angel Investors or Venture Capital Companies • Asset-Based Lenders • Equipment Leasing • Purchase-Order Financing • Stock financing • A/cs receivable - Factoring Companies • A/cs receivable - Invoice Discounting What are some Alternatives?

  12. Venture Capitalists Who do they finance? • New companies with cutting-edge idea or product • Newer companies with business plan

  13. Venture Capitalists What are they looking for? • An opportunity to make a good return on investment • Usually will want an equity position and many times a management or controlling position • Sometimes will finance with loans

  14. Asset-Based Lenders Have to have assets! • Real estate • Machinery • Patents or trademarks • Inventory • Receivables • All of the above

  15. What will it cost? • The amount charged will depend on the amount and quality of your assets • Typically it will be more than a bank would charge • Remember, your bank has declined to finance your business Asset-Based Lenders

  16. How does it work? • Manufacturing or office equipment • Leasing company purchases equipment and “rents” it to you • Opportunity to purchase equipment at end of lease period Equipment Leasing

  17. How does it work? • Obtain official Purchase Order from your customer • Customer has to have good credit • Find a reliable supplier/manufacturer for your product, domestic or foreign • Place order with supplier/manufacturer Purchase Order Financing

  18. What is factoring? • Loan money using accounts receivable as collateral • Usually with recourse to company and company owners • Usually requires that all receivables be pledged • With or without notification to your customer • Manages collection of accounts • Speeds up cash flow Factoring

  19. Factoring What does it cost? • How much advanced depends on credit quality of A/R • Interest rate depends on credit quality of A/R • Fees imposed for collection service

  20. How Does It Work? • Simplified factoring • Single or multiple invoices • Is not usually credit management or accounting • Is not usually collecting debts • Credit quality of customer is most important Invoice Discounting

  21. Traditional bank financing cheapest • Banks normally require property security • Landscape has changed • Different types of alternative finance • Choice and mix depends on need, cost, position in company history Summary

  22. How do You Find Alternative Financing Companies • The Internet / Yellow Pages • Brokers • Business associates The $64,000 Question

  23. Search for these terms • Asset Based Lenders • Equipment Leasing Companies • Purchase Order Financing • Factors • Invoice Discounters Internet Resources

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