How can SMEs meet their financing needs?

A fundamental requirement for SMEs to know their financing needs is to carry out a good financial diagnosis that will allow you to guarantee your short-term liquidity. This must be reliable and automated through the use of good accounting software that will make it easier for you to make the right decisions.

The non-profit association CESGAR has published the XI report on financing for SMEs in Spain for the year 2021. It shows that the financing needs of small and medium-sized companies have reached very high values, the highest since 2015, the year in which the first report was carried out. In 2021, 57.9% of Spanish SMEs have had financing needs which is an increase of 23 points compared to the last pre-pandemic data.

This data, which in principle could be alarming, responds to the global economic crisis and the recession caused by the Covid'19 virus. We will soon know the data for the current year and it is possible that external financing will increase even more due to the conflict that has arisen between Russia and Ukraine and the recent energy crisis.

For this reason it is worth remembering which are the main financing channels and within them the different sections with which to obtain liquidity for your business.

Bank Financing

Although experts believe that in the coming years bank financing will lose weight, at present the banking sector continues to lead the ranking in terms of both the products it offers and the conditions. It is true that the recent world crisis has led to a rise in interest rates, which is affecting the increasingly scarce supply of institutions. The strict supervision to which banks are subject also hinders the credit process and slows it down.

But we must not give up despite these difficulties, as more than half of Spanish companies resort to credit as their main source of external financing. Thanks to banks, SMEs can cover practically all their needs, such as the financing of working capital, fixed assets or expansion projects, collection and payment circuits, international operations and insurance, among many others.

Alternative financing

Non-bank financing continues to grow and consolidate in our country as an alternative to traditional financing. The field of alternative financing is made up of many entities with specific products different from those of the banking sector or with some specific advantage. The reality is that there are many entities but with few products per entity, which makes it difficult to cover all needs with alternative financing alone.

One of the characteristics that differentiates alternative financing entities among themselves is how they fund themselves. Some do it with the contribution of institutional investors, others with private investors through crowdfunding, both with public funds and with their own funds. SMEs can find products such as factoring (invoice to invoice), confirming (short term loans), long term loans, mortgages or not, import and export financing lines, among others.

Public Financing

Public financing has grown a lot in recent years, filling the gap caused by the scarce supply of banking services. The range of entities in this field is very wide, whether at regional, national or European level, there are a multitude of organizations that channel public funds. Entities such as the ICO, the CDTI, ENISA, the EIF or the EIB are the most common. Also noteworthy are the Mutual Guarantee Societies (SGR), which provide guarantees to SMEs so that they can apply for financing in both the banking and non-banking spheres.

Public financing is channeled through a third party, normally banks, although there are more and more alternative financing entities that channel it through the public entity that manages the funds.

SMEs can access almost the entire range of financial products through public bodies, which also offer very favorable economic conditions and very convenient repayment terms.

What are the financial instruments most used by SMEs to finance themselves?

Taking into account the aforementioned report, the most used instruments are the following:
  • Supplier credit or trade credit: This form of financing is again at levels close to 24% and is up by more than 7 percentage points compared to pre-pandemic levels. This is the fastest and cheapest form of financing, since, except for the loss of early payment discounts, it is free for companies.
  • Bank loans: 22.5% of SMEs have resorted to this source of financing.
  • Credits or loans from ICO lines: The deployment made by the ICO during the pandemic can be seen in the following table
  • ICO during the pandemic can be seen in the significant increase in applications in 2021, which stands at 19.7%.
  • Bank lines of credit or bank discount: this source of financing was used by 17.8% of SMEs.
  • Leasing or financial leasing: it has also experienced significant growth in its utilization levels, from 9.4% in 2020 to 12.6% in 2021.
  • Other banking products, such as factoring or conforming, show lower utilization levels, which is probably explained by the drop in activity in many SMEs during the pandemic.
Financing for the digitization of companies

The pandemic has undoubtedly accelerated the digitization process in companies. 22% of SMEs have had financing needs to face investments related to digitization or sustainability in 2021 and 20.4% believe that they will need it in the next three years. These figures make both processes one of the main destinations for financing after working capital.

Sage Solution

Sage offers a wide range of accounting and invoicing solutions adapted to help companies in their digitalization processes. If you are also a beneficiary of the Digital Kit, the digitization of your company will already have part of the necessary financing.