Loans are integral to industry development in the Philippines, helping entrepreneurs and business owners grow and reach success. However, for small to medium enterprises (SMEs), financing is another barrier they must overcome. Most traditional banks tend to have rigid requirements, which makes applications difficult for some SMEs.
This challenge significantly affects the Philippine market since SMEs make up 99% of businesses in the country and employ 62% of the workforce, based on data from BusinessWorld. Thus, a drop in SME progress could cause an economic slowdown.
Fortunately, alternative financing options make applications more manageable to support these enterprises. Knowing how to finance a business with alternative funding ensures your company’s survival during financial difficulties. With that, delve deeper into this financing approach for SMEs.
What is Debt Financing?
Debt financing involves borrowing money to fund your enterprise by selling debt instruments in exchange for funding. It’s a versatile tool outside of traditional bank loans that counts as a type of alternative financing.
Unlike equity financing, wherein lenders get an equity share of your company, debt financing gives you complete control over your SME. Investors aren’t shareholders, so they don’t have a say in how you run it. Moreover, interest payments are tax-deductible, so you can subtract them from your tax obligations.
Learning how to get financing for a small business with debt financing is helpful in case you’d need to fund your SME. However, it’s just one of the many alternative financing options for SME owners. There are also other ways to fund your business. You may consider the alternative financing options below to find what suits your needs.
5 Types of Alternative Financing for SMEs
A popular approach to funding your small business is calling for financial contributions from multiple individuals, which many refer to as crowdfunding. The process typically entails creating crowdfunding campaigns stating the amount required to finance your budding business.
Forecasts suggest that global crowdfunding could reach $42.93 billion by 2028, with an annual growth rate of 16.40% from 2022, attesting to its effectiveness. So, if you’re having difficulty financing your SME through single entities, consider casting a wider net by crowdfunding.
2. Angel investors
An angel investor is an individual who uses their own money to invest in an SME or entrepreneur, often in exchange for an equity stake.
Angel investments are significant to businesses worldwide. In 2021, the total funds invested through this approach were $29.1 billion, 15.2% more than the previous year. Moreover, remember that angel investors tend to fund already stable SMEs, so they’re an excellent complement as one of your small business’ sources of finance.
3. Venture capitalists
A venture capitalist is another private investor funding small companies for an equity stake. While they may seem similar to angel investors, there are distinct differences between them. For instance, while angel investors’ only goal is financial support, venture capitalists aim to develop the company through direct participation in its operations.
That said, venture capitalists also prefer to invest in SMEs already set for growth, so check if your company fits the bill before approaching a firm.
4. Government-backed loans
You could also get a business loan from the government. The primary benefit of government-backed loans is their extremely low-interest rates. Hence, they significantly help SMEs without the capacity to pay for higher rates.
The two primary issuers of government-backed loans in the Philippines are the Small Business Corporation (SB Corp) and the Department of Trade and Industry (DTI). However, remember that you must be a registered contributor to the government body from which you want a loan.
Money from your savings, borrowed from friends and relatives, or earned from selling assets can also fund your SME in a process called bootstrapping.
This approach is typical for micro-businesses, such as sari-sari stores, that require a small amount to progress. However, many corporate giants today started as bootstrapped enterprises, such as GoPro, in which founder Nick Woodman poured $10,000 of money he earned from selling bread and belts into the business.
When to Consider Alternative Financing
You have a poor credit score
Credit scores inform lenders about your reputation as a borrower. However, traditional financing options often have high credit requirements, which may take time for startups to reach, given their risky environment. Alternative financing solves this problem by providing loans to SMEs with little or poor credit scores, helping them expand.
You need quick funding
Getting a loan from traditional banks is often time-consuming, which is detrimental, especially if time is critical for your SME’s growth. Fortunately, alternative financing providers generally offer speedy procedures and low-interest rates to receive your business loan as soon as possible.
You’re rejected in traditional financing
Traditional banks often have labor-intensive application processes unfavorable to SMEs, making it challenging to secure approval, not to mention the stringent requirements, which may lead to your rejection. Meanwhile, alternative financing options, especially those from online lending companies, generally have minimal paperwork, making approval easier.
You have no collateral
Banks often require valuable assets as collateral to ensure your payments. In contrast, alternative financing providers generally don’t involve collaterals or personal guarantees, so you won’t have to worry about putting your assets at risk.
Expand Your Business with Alternative Funding
SMEs comprise a vast portion of Filipino businesses, hence the importance of financially supporting them to keep the economy and workforce afloat. However, given banks’ strict application requirements, it may be challenging for these enterprises to acquire loans.
Fortunately, alternative financing options exist. With lenient requirements, swift processes, and low-interest rates, SMEs can finally gain the resources to facilitate expansion.
Are you looking for alternative financing for your enterprise? JK Capital provides quick approvals and non-collateral loans to help it flourish. Contact us to learn more about our business loans, application processes, and other related services, and visit our Facebook page for updates.