Small and medium-sized enterprises (SMEs) are one of the main engines of our economy: they account for more than 90% of Europe's business landscape and employ two-thirds of the workforce.
Financing has become one of the most important issues for SMEs since the 2008 crisis, and COVID-19 has only underscored its importance.
Today, it is essential for companies to have the liquidity they need to run their operations, grow, and expand, and to adapt successfully to constant market changes.
However, most SMEs face many difficulties and obstacles when it comes to finding external financing, mainly due to tighter conditions for accessing credit and the interest rates required.
That's why it is essential for every company to understand in depth the main financing options available to it and the full range of possibilities it has. Here they are.
Private investment
Financing through private investment is gaining ground, and more and more SMEs are choosing this route to obtain resources by bringing in new partners.
When we talk about private financing, we mainly mean the sale of all or a percentage of the share capital, or a capital increase in exchange for financing. There are many types of investors, and each has different goals and interests; knowing them will help us find the best investor for our company.
One of the advantages of bringing an investor partner into the company, compared with other financing alternatives, is the greater involvement this type of partner will have in developing the business. Because they share in the profits and losses, they will have stronger incentives to contribute to the company's success, and investors usually bring valuable experience and technical expertise, for example in finance or strategy, that can add significant value beyond the capital invested.
On the other hand, it is crucial, especially for strategic buyers or investment funds looking to make add-ons, to be able to exploit synergies, that is, the benefits resulting from integrating two different business structures. This is one of the biggest attractions of M&A deals: by combining two or more existing organizations, the resulting company can leverage complementarities, economies of scale, and greater efficiency.
Broadly speaking, we can find the following types of investors:
- Strategic buyers
- Financial buyers (private equity funds, search funds, business angels, family offices…)
- Individual investors
At Deale, we want the SMEs registered on our platform to be able to access this type of financing, since it offers many advantages and is much more versatile and flexible in adapting to the particular circumstances of each business.
Bank financing
Bank financing is the most traditional form of financing. Through it, SMEs apply for corporate debt in all kinds of formats, depending on their specific needs and the purpose of the funds, in order to sustain and drive the growth of their business.
To do so, they have a wide variety of instruments designed for both the short and long term. These include leasing, loans, credit lines, discount lines, and invoice discounting, among others.
Even so, despite being the most common option for all companies, SMEs face certain difficulties in accessing these instruments, as the requirements for granting them are increasingly strict.
In many cases, to grant a loan, the bank may require guarantees or collateral that the company cannot provide. It is also common for companies to have to pay fees associated with the loan on top of the interest. All of this only increases the cost of financing and makes it harder for a large number of small and medium-sized enterprises to access it.
Public financing
When we talk about public financing, we mean external financing that comes from a government institution or public body.
In addition to direct grants, related, for example, to environmental or digitalization projects, the most common form of financing is loans, which require the company to repay the amount borrowed within a set period, under conditions or interest rates that are, in principle, more favorable than those available on the market, provided certain requirements are met.
The main public financing lines are:
ICO
ICO lines are offered by the Instituto de Crédito Oficial (Spain's Official Credit Institute) through banks and are aimed especially at SMEs and entrepreneurs. Through them, companies can finance their liquidity needs and investment projects.
They are structured into a national block, to finance any activity or business within Spain, and an international block that aims to support the international expansion of Spanish companies.
To apply, companies must show that the pandemic has affected them negatively, and having their registered office in Spain is a mandatory requirement. They must also justify how the loan will be used since, for example, these loans cannot be requested to pay off debts that predate COVID-19.
What really makes these loans attractive is that they have few requirements for approval and are fully compatible with other aid.
ENISA
The Empresa Nacional de Innovación (National Innovation Company) is a public body whose goal is to provide financing to small and medium-sized enterprises that want to drive innovative business projects.
Both companies in the startup phase and those seeking financing to consolidate their position in the market can access this public support. However, depending on the company's stage, they will be eligible for one line or another. Broadly speaking, the different lines ENISA offers are:
- ENISA for entrepreneurs: this line was created to help companies in the startup phase.
- ENISA Competitiveness: aims to drive the growth and consolidation of existing companies.
- ENISA mergers and acquisitions: through this line, companies can finance corporate transactions to drive their growth.
Next Generation EU European fund
Through the programs of the Recovery, Transformation and Resilience Plan delivered via the Next Generation EU European fund, SMEs have access to a wide range of grants and loans, funded by the European Union and designed to cushion the impact of the COVID-19 pandemic and drive recovery and economic growth based on values such as digitalization, sustainability, and internationalization.
This fund allows small and medium-sized enterprises to apply for financing either to go digital or strengthen their online presence, or to expand internationally or boost the development of their business.
In short, although there are several financing options, SMEs face many obstacles when it comes to obtaining traditional bank financing, as the conditions for approval are increasingly strict and, in addition, interest rates and associated costs tend to be high and can even be prohibitive for many companies.
As a result, more and more small and medium-sized enterprises are turning to alternative financing to drive the growth of their business, meet their financing needs, or expand internationally.
At Deale, we want to make it easier for SMEs to access financing and inorganic growth through private investment. That's why our goal is to help SMEs and investors find and seize the best opportunities and close the best deals.
