As a result, many banks require extensive collateral from SMEs. These are sometimes business-critical assets, such as the property business is conducted in, or the vehicles used for business operations. If such assets are seized when an SME fails to pay back a loan, the business may never recover.

However, today SMEs have improved access to working capital through alternative financing options. In Hong Kong, a combination of fintech innovation, government support, and openness from banks has opened up a range of new avenues for SMEs to access funds. 
 

Government grants

The government has reduced fees to guarantee SME loans by 50 per cent, increased maximum loan quantums to HK$15 million (US1.9 million), and lengthened the loan guarantee period to up to seven years. 

As these examples show, the type of grant and amount of funding largely depend on the reason for seeking out a loan. SMEs need to take note of the eligibility requirements for each funding scheme. 

Alternative lending platforms 

Through alternative lending  platforms, SMEs can get unsecured loans without having to go through the usual hassle of bank applications. Approval times are quicker and businesses can borrow smaller amounts that they typically cannot obtain from banks. 

Access to clear, accurate, and updated financial records also gives some lenders the confidence to increase loan quantums, or provide lower interest rates due to a more accurate perception of risk. 

These alternative loans  are ideal for SMEs that cannot risk putting up business-critical assets, such as machinery, as collateral for standard bank loans.

Revenue-based financing

Revenue-based financing (RBF) is a way for SMEs to raise capital without surrendering equity or taking on debt. Through RBF, investors receive a percentage of the SME’s gross revenue in return for their invested cash, up to a maximum amount. 

For example, an SME might agree to pay 8per cent of gross revenue to an investor, until it has repaid 2.5 times the initial amount of cash invested. As this is not a loan, there is no fixed repayment and no interest rate. While there is no equity surrendered, investors still have an interest in how well the company performs, as it affects their returns. Investors are hence inclined to use any leverage they have to assist the business. 

The downside is that SMEs have no definite idea of how much they’re actually paying until the sales figures come in. The total amount repaid – however long this may take – may also end up being more expensive than a conventional loan in the end.

RBF is an especially popular method of financing for innovation-driven SMEs that need high initial funding, but cannot risk interference by shareholders or partners who may not understand a new, unprecedented product or service. 

RBF can be tied in with transactional data and machine learning technology. For example, some such services use transactional data from Point of Services (POS) devices, to record daily sales. Through machine learning, patterns can be identified, and appropriate loan options are pushed through to the client. 

Venture capital funding

Venture capital (VC) funding is private equity funding that takes place over several rounds. The seed round is when investors put in the initial funds required and is a high-risk stage for which venture capitalists expect significant equity. This is followed by subsequent funding rounds.

After each round of financing, the SME is expected to meet certain milestones. Failure to do so can lead to investors pulling out in subsequent rounds. 

VC funding brings a lot of direct involvement from the investors. In fact, many SMEs seek VC funding not simply for the cash, but for the expertise and influence of the VCs themselves, who can use their connections to help the business grow. 

Angel investing

Angel investors are usually affluent individuals who choose to invest directly in an SME – think Shark Tank, the American reality television series. While investments are typically driven by financial interests, angels may also have other compelling reasons for investing. For example, “impact investors” may want to invest in companies that they see as contributing to social good. 

As such, the reasons –and demands – of an angel investor may be much wider than an SME can expect from VC funding, RBF, or other forms of financing. As with VC funding, this is not suitable for SMEs that desire total control, as they may have to cede partial – or sometimes even majority – ownership to the angel as a condition of funding.

Retail-based crowdfunding 

Although P2P lending is a form of crowdfunding, there’s an alternative form made famous by sites such as Kickstarter. Using this model, an SME seeks funding from a wide public who have an interest in seeing its product or service come to fruition.

The investors don’t typically expect financial returns, but will be the first to receive the SME’s product or service. This may come with some form of customisation or bonus products.

While apparently “free”, this is a slow and demanding way for SMEs to raise funds. Significant efforts must go into marketing the product or service that may not yet exist. It’s a great way to gauge market demand, though, and to build funds for production.

Thinking beyond business term loans

The key is for an SME to identify both its funding goals and capacity to pay back loans.