Yet, an SME might raise new funds from the following sources:
Businesses require an adequate amount of capital to fund extra production expenses or pay for expansions. As such, companies take out business loans to gain the financial assistance they need. A business loan is a debt that the company is obliged to repay according to the loan’s terms and conditions.
Raising medium-term finance to fund operations is often more difficult for SMEs as banks are traditionally rather conservative. Hence, many SMEs end up financing medium-term, and potentially longer-term assets, with short-term finance such as an overdraft.
Moreover, banks will often require personal guarantees from the owner of the SME, which means the owner has to risk his personal wealth in order to fund the company.
SMEs, like any company, can take credit from their suppliers. However, this is only short-term and, indeed, if their suppliers are larger companies which have identified them as a potentially risky SME, the ability to stretch the credit period may be limited.
Leasing assets rather than buying them is often very useful for an SME as it avoids the need to raise the capital cost. However, leasing is only really possible on tangible assets such as cars, machines, etc.
Leasing might be attractive to the lessee:
i) if the lessee does not have enough cash to pay for the asset, and would have difficulty in obtaining a bank loan to buy it, and consequently the lessee will have to rent it in one way or another if he/she is to have the use of it at all; or
ii) if finance leasing is cheaper than a bank loan. The cost of payments under a loan might exceed the cost of a lease.
Operating leases have further advantages:
• The leased equipment does not need to be shown in the lessee's published balance sheet, and so the lessee's balance sheet shows no increase in its gearing ratio.
• The equipment is leased for a shorter period than its expected useful life. In the case of high-technology equipment, if the equipment becomes out-of-date before the end of its expected life, the lessee does not have to keep on using it, and it is the lessor who must bear the risk of having to sell obsolete equipment second-hand.