How to obtain financing as an SME 

by | Jan 16, 2023

Options for financing an SME 

Today we will talk about one of the most important needs for any entrepreneur or anyone who is thinking about expanding their business, how to get financing 

Getting financing for your venture or for your small business can be one of the most complicated tasks, especially for less known companies, however there are some alternatives with which you can surely raise the capital you need and today we will tell you what are their advantages and disadvantages, so you can assess which is the best way to get funding. 

Two ways to obtain financing 

When we have the dream of starting our own business one of our biggest questions is how am I going to get the capital to start it? This is a very common question because almost no one has all the money on hand to start their business, of course most people think of saving or borrowing, but these are not the only options. 

Financing options can be classified into two main types: credit or investment. 

Credit options 

One of the most common options for obtaining financing to start a small business or expand is credit. Currently, there are several financial institutions that offer loans specially designed for small businesses and entrepreneurs. 

A loan is a sum of money granted by a financial institution as long as you comply with the requirements established. If your application is approved, you assume the commitment to return the borrowed money in a determined time and with the agreed interest. There are different institutions that can offer you this type of financing, some are governmental and others are private. 

The advantage of this type of financing is that you will have more freedom to move the capital as you need it, since the institutions that offer this type of loan will not usually ask for accountability or justification of expenses, unless the loan comes from a government institution. 

One of the big disadvantages of using a loan to finance your venture is that they are often difficult to access, and if the interest rates are not well negotiated, you can end up paying a very high and inconvenient percentage, so if you do not manage well or do not start to see profits, a loan can become a problem.   

Government loans 

The Mexican government can offer loans and financing for your business through various programs and calls for proposals, most of which are focused on micro-enterprises or one-person projects. Although most loans are granted at the federal level, these types of loans are also granted at the state level, so it is best to be aware of the calls for proposals at the state level. 

The main advantage of government loans is that compared to other types of loans they are usually more flexible, with lower interest rates and better conditions.  

One of the most important disadvantages of requesting a loan from a government institution is that they are not an option in case of emergency, since the application and access depends on the timing of a call for applications. 

You can check the websites of FONDESO (Fondo de Desarrollo Social) and NAFIN (Nacional Financiera) to be aware of the calls for proposals and programs. 

Independent credits 

If you are interested in obtaining a loan to finance your venture but you prefer to resort to private institutions, you are lucky because nowadays you have a great offer so you will probably find better conditions than in the past.  

Traditionally banks were the institutions that could offer credit for small businesses in a safe way, however today there are several financial institutions that offer better conditions and less interest, you can even contact and process your credit from an application or from their website, such as Konfio, Creze. 

The recommendation is to check if they are registered with Condusef to check if they are companies that operate legally in Mexico and thus avoid fraud or scams. 

 

Search for investments for SMEs 

If you prefer another type of financing you can choose to have investors or enroll your company in a funding program, the advantage over credit is that you will not have to return the borrowed money, or interest, plus today there are a variety of options that you can access. 

Another advantage is that many of these institutions in addition to investing in your project can offer advice and mentoring on some functions in your company, so they can be the best option when you are about to start. 

For many SMEs, this type of financing has certain disadvantages, such as the fact that you regularly have to cede some shares or part of the company, and you also have to comply with certain parameters and objectives that you did not have planned. 

Investments for your SME can be obtained in different ways:  

 

Incubators and accelerators 

Incubators and accelerators are organizations that share the goal of helping a small business grow. Incubators focus on small businesses that are in their planning phase or have just started operations. In this sense, they provide you with capital, advice and facilities to consolidate your project 

On the other hand, accelerators focus on companies that have already passed their first stages and seek to consolidate them, just as incubators provide capital and advice but with the aim of growing the company. These types of organizations are ideal options for technology and innovation companies, however due to the demanding nature of their programs they do not usually accept many companies, in fact the average acceptance rate is only 3%.  

If you think it is a good idea for your business, you can look for more information in the DOERS program of Fundación Iniciativa or in the website of the Ministry of Economy to learn about other incubators.  

Business angels or private investors 

Business angels or private investors are individuals who give their capital to emerging companies, usually in exchange they ask for shares and participation in the company. To access this type of investment you can approach investor networks such as Angel Investment Network where entrepreneurs and investors interested in new projects are contacted. 

Crowdfunding 

Crowdfunding is a collaborative mechanism that can help you obtain the financing you need for your venture. This financing model is being used not only by entrepreneurs, but also by different associations and charities to get the funding they need, since there are no banks or intermediary institutions. 

With crowdfunding you will get donations from different people who mostly do it altruistically or you can motivate donations by offering small gifts or company shares. 

To obtain this type of donations you have to send your project or idea to a crowdfunding platform, with a detailed description of the project, amount of money you need, and time to raise it. If everything is correct, your project is published for you to start fundraising.  In Mexico the most used crowdfunding platforms are: Donadora, Fondify and HipGive. 

What you need to start looking for financing 

Whether you decide to get a loan or seek financing, the first thing you need to know is that you need to be prepared to get it, especially if you want someone else to invest in it. That is why it is important to start by designing a business plan and above all a value proposition. 

Establishing a financial plan with concrete goals and clear expenses and budgets can make the difference between whether investors decide to support your project or not, in the end it is a way to demonstrate how much you know about the market and how viable it is. 

 

Today there are more options to finance a venture, however not all options can work the same way for all companies, so it is important to have clear goals. Now it’s your turn, tell us what you think is the best way to finance an SME.   

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