In this article, we will present the different sources of financing available, in addition to explaining what you need to consider before seeking financing. We will also share some tips that can help you when seeking the capital you need to grow or consolidate your business.
Financing, for what purpose?
Before starting to seek financing for your company, be clear about what you will use it for. Consider that each financing product is designed for specific circumstances. Therefore, it is important to choose the option that best suits the needs of your company.
For example, if your need is to finance the payment of salaries, suppliers, inputs, or inventory, consider short-term asset-based financing options, such as accounts receivable acquisition (factoring).
If you need financing for the purchase of fixed assets (such as machinery), investment projects, or product development, evaluate long-term financing options, such as bank loans.
If you are looking to finance the purchase of real estate (offices, land, or an industrial warehouse), a mortgage loan could be the most suitable instrument for you.
Now, if you are starting your business or it is still in a very early stage, the most viable financing options for you are seed capital investments, crowdfunding, and even funds from family and friends.
On the other hand, if you are looking for financing to expand your production, scale marketing, or enter new markets, consider seeking financing through venture capital.
Types of financing can be classified into two main categories: debt and equity. Debt financing involves borrowing money for a specific period, with the commitment to repay it along with the generated interest. In contrast, equity financing means that the funder acquires a stake in the ownership of the company. In this case, there is no obligation to repay.
Based on this distinction, what type of financing are you looking for?
Prepare to seek financing
In addition to understanding the capital needs of your company, there are other aspects to consider before seeking the financing you require. In this video, you can explore these steps in detail, but we'll summarize them for you:
Know your business
Remember that your search for financing must address a need to be solved and, ultimately, be related to the growth of your business.
Therefore, it is essential to invest in a well-studied and consolidated idea, have a clear understanding of your SME's business model, how you will make it profitable, and also have a clear understanding of your company's finances. This will help you when presenting yourself to potential funders.
Define the stage your company is in
Once the above is defined, it is important to be clear about the stage your company is in to know which financing is ideal for it.
If you are just starting, the most suitable financing solution may be a partner who contributes capital or seeking support from family, friends, or acquaintances. While more robust companies will be more likely to access investment funds or more investors, as a consolidated company conveys more security to potential investors.
But this distinction in stages does not mean that you cannot try other sources of financing.
Evaluate the costs of financial solutions
We have talked about different types of financial solutions according to the profile and development stage of companies. But another factor to consider before deciding on an option is the interest rates and associated costs that each financing entity has, such as disbursement cost, insurance, etc.
Weighing these costs will also help you find the ideal financing solution for your SME.
Remember that, in the case of debt financing, the choice of a financing solution also depends on your ability to pay.
Financing for agribusiness SMEs
It is also important to know that not all financing options are suitable for SMEs focused on agribusiness.
For example, corporate bonds (financing through the issuance of debt securities acquired by investors) are products especially used by large companies. In the case of bank loans, they may not be accessible to some SMEs due to their lack of credit certainty.
Therefore, we suggest considering alternatives beyond traditional financing solutions. We share three debt financing options that we consider suitable for the profile of small and medium-sized companies in the agri-food sector.
Digital financial services (Fintech):
These are companies that offer financial services through the use of innovative technology. It is a rapidly growing sector because it has made financial products more accessible and, in many cases, offers better financing solutions than traditional banking and is usually more flexible. In Latin America, they have become a financing option for SMEs to the extent that they are helping reduce the financing gap for these sectors, according to a study by the University of Cambridge and the IDB.
In Central America, fintech has not grown at the same level as in other countries in the region; however, there are several options in Costa Rica, Honduras, El Salvador, and Guatemala. You can learn more about the regional presence of fintech here.
These are financial instruments that, instead of focusing on the creditworthiness of companies, are based on the value of specific assets. The most well-known and used modalities are factoring and leasing.
Factoring involves the acquisition of accounts receivable from a company (invoices, promissory notes, checks, and bills of exchange). There are other instruments that are also based on future cash inflows associated with accounts receivable: advance and discount of invoices. The difference with factoring is that in this case, the funder manages the collection of invoices, assuming the payment risk. This product is offered by banks and specialized entities and is recommended for financing operational and short-term expenses.
In the case of leasing, the company is granted the right to use an asset (such as machinery or a building) for a specified period in exchange for the periodic payment of a fee or rent. The assets remain the property of the funder, but the company is given the option to purchase at the end of the lease period.
This product is provided by banks, specialized entities, and investment funds and can be ideal for agribusiness SMEs looking to finance the acquisition of machinery, for example.
Development promotion entities:
Development banks in each country usually have specially designed debt financing products for SMEs or offer them financing with preferential interest rates.
Likewise, there are multilateral financial institutions, development financial institutions, and development agencies that promote economic growth in developing countries and offer financing products for small and medium-sized enterprises.
The Central American Bank for Economic Integration is an example of this. It has various intermediary credit programs for SMEs in the region, including one focused on agribusinesses to invest in new technologies.
Some private banks also have specific products for SMEs, so we suggest exploring the options available in your country that have financing instruments designed specifically for this sector, rather than seeking traditional credit financing.
Where to start?
If you don't know where to start looking for financing options, we recommend exploring the "Finánciate" tool on the ConnectAmericas platform. Here, you can find financing options from associated banks and financial services available in your country. It is a way to discover different financing options in one place.
In addition, ConnectAmericas members can access a complete list of banks associated with ConnectAmericas in their country, as well as information on financing to internationalize their business (according to their company's sector) and a system to directly submit their company's requirements to associated banks.
Are you interested in becoming a ConnectAmericas member and enjoying these benefits? You can register here; it is quick, easy, and free.
On the ConnectAmericas platform, we also have various articles, webinars, and other resources to learn more about financing alternatives, especially for SMEs and exporting SMEs. Access them at this link.
Additionally, you can access the "Financing Your Business" course, which delves into identifying the financing needs of your company, preparing your company for the financing process, and navigating successfully through that process. Access the course here.
Congratulations, you got financing! And now?
As you have seen, obtaining financing is a process that requires preparation and planning. Therefore, once you get it, it is important that the way you use it actually contributes to the growth of your business.
Here are some tips to achieve this:
Stick to your goal and set a budget.
Prioritize activities that generate the most value for your business or the most profitable product.
If you have obtained financing through a loan, maintain a healthy financial image and pay your payments on time.
If you obtained financing to grow your business, consider investing in training your employees or digitizing your business.
Finally, we recommend reviewing the "Financial Management for SMEs" course, where you will learn tools and guidelines for better financial decision-making and more efficient administration of your company. It is an online course and free.
Some final recommendations:
When looking for your financial solution, we suggest creating a comparative table listing the financial entities you plan to approach, interest rates, and the types of associated costs (disbursement, insurance, opening) for each one to weigh them and evaluate which one suits you best, according to your ability to pay.
Consider participating in acceleration programs or business incubators to obtain additional financial advice.
Develop a solid and detailed business plan to demonstrate your ability to pay to financing entities.
Consider having legal support when negotiating a loan or investment, especially if it is your first time seeking financing. As your company grows, you will have more negotiating power, but in the early stages, it is better to be proactive.