EU-REPARIS is funded by the European Union and is a part of WB EDIF. WHAT IS THE BEST LOAN FOR YOUR SME? UNDERSTANDING YOUR FINANCING NEEDS AND OPTIONS SMEs often go to their bank for a loan when it’s too understand the financial solutions that are available late. Banks reported that many SMEs wait until they from finance providers such as banks, and to be able face a severe cash constraint before they come to to make informed choices. the bank to request a loan. The company’s cash is nearly depleted, and their pockets are empty. This is This brochure is meant to help SMEs better too late, since banks cannot lend to companies that understand their financing needs and the options are nearly bankrupt. available to you. For more information, you can seek help from a financial advisor or accountant. Some Being able to plan ahead and identify financing banks can also be a source of help and financial needs before your company faces cashflow problems advice. is an essential business skill. It also important to WHY ARE YOU SHORT ON CASH? BE WARY OF USING CASH FOR EVERYTHING IS A LOAN THE SOLUTION? Often SMEs are cash-depleted because they are Banks said that SMEs are often requesting a cash loan using their own cash (or the owner’s) to pay for all without understanding why they are short on cash. their expenses, even large investments and working And sometimes, what they really need is not a loan capital. If an important client leaves or fails to pay, at all. Instead they need help to better manage their or the business faces an unexpected large expense, cash flow regarding their receivables and payables. you could find yourself cash-stranded, and may not be able to operate anymore. For example, some companies have problems on the collections side. Clients are given too much time to pay, or they may forget to pay and the company is not reminding them. On the other hand, companies might have issues with payables. In this case they can try to negotiate with suppliers and other creditors a longer timeframe for paying their bills. Several banks, especially those focused on the SME sector, can help SMEs with both loan and non-loan solutions for their financial management problems. A good financial advisor or accountant can also help SMEs find solutions to address their cash flow issues. Sometimes, there is not one solution but a combination of them. SMEs ought to review their finances and business operations regularly to identify needs for finance YOUR solutions. If your company is looking to expand its production capacity—for example, if you are FINANCING planning to build a new storage facility, purchase new equipment, or you have acquired several new clients—you should take this opportunity to ask if NEEDS AND OPTIONS bank financing or through other types of financing could help. YOUR FINANCING OPTIONS SITUATION Investment projects Negative working Liquidity issue (plant, production capital line, storage facility) ION UT SOL Factoring, improving N OA N-L collections, negotiating Equity Leasing NO with suppliers ION LUT Overdraft, SO revolving credit line, Working capital Investment loans AN LO trade credits Y RIT Short term. TU 6 months to 2 years 5-10 years MA Up to 3 months Type of interest Schedule of CONSIDERATIONS rate (fixed/ repayment of Currency Collateral variable/indexed) loan BANKS OFFER DIFFERENT TYPES OF LOANS TO ADDRESS DIFFERENT TYPES OF SITUATIONS LIQUIDITY NEGATIVE WORKING CAPITAL If a company faces a liquidity issue, meaning it is If faced with negative working capital, companies short on cash, several short-term loan options can should seek a working capital loan, of several months be considered, such as an overdraft or other short- to a couple of years, depending on its need. Or it term loan. Another option if your company faces can also try to find a partner or investor to increase seasonality in its operations, and knows that at certain a company’s equity. times of the year its revenues and expenses do not match, a revolving facility might be a good solution INVESTMENTS as you can draw on it when you need it. Another option is to seek out factoring in which the bank or Long-term loans should be used to finance industrial factoring company gives you money up front for equipment and other investments. Investments take payments (invoices) you are going to receive in the some time to generate increased revenues and using near future (keep in mind that this comes with a fee). short-term loans to finance them might mean you will be making very large payments that might not be able to afford. Another option to finance investments such as equipment and vehicles is to lease them, rather than buy them. LOANS COME IN MANY FORMS AND VARY IN TERMS OF THEIR CREDIT CONDITIONS When discussing a loan with a bank and comparing base interest rate (set by the Central Bank). So, when what banks have to offer, make sure you ask about there are fluctuations in the index, your interest rate and understand the credit terms and conditions. will automatically change, too. The good thing about There are many conditions that will determine the the fixed rates is that you will not face any surprises price and the risk that you will face when contracting a when it comes to repaying your loan. On the other loan. Sometimes it can be very difficult to understand hand, variable rate loans allow you to take advantage credit conditions. They might not be expressed of periods when interest rates are low. clearly and have complicated terms. Don’t be afraid to ask questions. Having a trusted financial advisor, LOAN CURRENCY such as your accountant, can also help. The currency in which the loan is issued and will be MATURITY repaid. Loans can be in local currency or in foreign currency. If you take out a loan is in Euro, you will The duration of the loan. Loans may be issued for face a risk that the Euro could raise against the dinar, a few months or several years. Short term loans are making your loan more expensive to repay. This is easier to obtain, but are not appropriate for certain particularly important if your revenues are in dinar. types of situations (such as financing investments). A Euro loan is cheaper than a dinar loan because it is you (and not the bank) who is taking on the risk if INTEREST RATE the dinar loses value. Expressed in percentages, it is basically what the OTHER CREDIT CONDITIONS bank charges you for the loan. A fixed or variable interest rate is an important consideration. For fixed These include a number of things, such as fees a rate loans, the interest rate you are charged and bank may charge, when you need to start repaying therefore the payments you make will be constant the loan, and what kinds of collateral and other over time. For variable rate loans, the interest rate guarantees you might need to provide. can go up or down. Variable rate loans are usually indexed or tied to something, such as inflation or a