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Financing Options for SMEs

Like all businesses, the SMEs that have made their mark in Singapore's corporate history are not created in a day. They all go through a general 'life-cycle' of development, from 'Start-up' to 'Growth', then to 'Internationalization' and finally, to 'Sustaining or Cashing-out'. Throughout this 'life-cycle', SMEs would invariably have different needs for funds to carry out strategies and projects. These are depicted below.

Financing Options

The financing options that are discussed in this section are broadly classified into several categories, as depicted in the table below:

SME Financing Map

	Start Up	Growth
Debt Financing	Short-Term Debt Financing: Overdraft Letter of Credit Short Term Loan Bill of exchange
Debt Financing	Long-Term Debt Financing Leasing	Long-Term Debt Financing: Term Loan Leasing
Equity Financing	Private Business Angels Family and friends	Private Business Angels Venture Capitalists Public Initial Public Offering (IPO)
Other Financing Options	Factoring Internal Financing: Working Capital Management Deposits Management Commercial Practices Management

Debt Financing

This section discusses the various types of debt financing options that are available to SMEs. Debt financing can be broadly categorized into two main types: long term instruments and short-term instruments. They differ largely in terms of their level of risk to the company and the cost of servicing.

Equity Financing

This section discusses the various types of equity financing options that are available to SMEs that do not wish to take on extra financial obligations in the form of debt capital. In contrast to debt financing, equity financing involves 'selling' off part of the company's net worth. This naturally means that the new owners willingly take on part of the company's risks and rewards.

Under the equity financing option, SMEs can obtain funds from private investors (including individuals, institutions and fund groups, and venture capitalists), or the equity markets by listing the company on a stock exchange (for e.g. SGX Mainboard). As there are considerable trade-offs in both options, SMEs must carefully evaluate the costs and benefits vis-à-vis their financing needs and stage of maturity.

Others

This section discusses two additional avenues for SMEs to free cash resources for running and expanding their operations: factoring and internal financing. Factoring is an option available to companies with a considerable amount of high-quality accounts receivables. The company can obtain cash by 'selling' these receivables to institutions which offer such services (factors). Internal financing is a process in which the company frees up 'locked-up' funds by managing its inventories, receivables and deposits.