Tips for SMEs Applying for Alternative Financing

Tips for SMEs Applying for Alternative Financing

Many organisations encounter roadblocks on their path to success due to restricted cash flow and few financial options. Whether you are trying to acquire funding to bolster your business or ease cash flow constraints, there are financing options available outside of traditional lending institutions.

If you need capital for your business but do not qualify for a loan through the traditional channels, there are several financing options available through alternative lenders. Some of the benefits SMEs can expect from alternative financiers is that they often have less stringent requirements, are more flexible, have more options available and can tailor their services to the clients’ specific needs.

Merchant Factors looks at some of the financing options available to SMEs and the requirements they need to meet to attain alternative financing.


  • Equity funding is the process whereby a company sells off a portion of their business to a third party to generate capital which can then be used to stimulate business operations or increase production. This form of funding is seen as expensive as it has no tax benefits, unlike debt financing options, where the interest on the debt is tax-deductible. The biggest drawback for SMEs is this type of financing requires selling off part of their business.

  • Debt funding is when a company ‘lends’ money from individuals or other institutions in the form of corporate bonds, bills or notes and is classified as a type of loan. A company will pay interest on the amount borrowed and refund the initial ‘loan’ amount at the date of maturity. This type of financing can be risky as the company is obligated to make interest payments on the loan regardless of its financial situation.

  • ‘Hybrid’ financing has the characteristics of both debt and equity financing. A good example of this type of finance is preference shares and debentures. Hybrid funding options often exhibit bond-like returns but present with equity-type risk

  • Asset-backed financing is an alternative funding option that can be tailored to the specific needs of the business and the industry in which it operates.
This type of financing uses the business’s assets, whether it be inventory, accounts receivable (debtors’ book) or physical assets (such as equipment and/or property) as collateral for a loan. This type of loan is particularly suited to financing growth and transactions.

Asset-backed financing provides business with options that more traditional financing avenues don’t. One example of this type of funding is factoring, where the amount of capital advance grows with the growth of your business’s sales.

Factoring is a type of financing that can greatly benefit SMEs as it allow the business to get the cash flow injection it needs to stimulate business operations and maximise output, instead of having to wait on debtors to settle their outstanding accounts to do so.


    Debt financing is borrowing money that is paid back in instalments along with interest. A typical example is a bank loan.

  1. Selecting the right financier
    There are many alternative financing institutions to choose from in South Africa, and it is crucial to partner with the right institution. Make sure you do thorough research into the financial institution you will be partnering with.

    Below are a few factors to consider when choosing an alternative finance institution:

    i. How long has the institution been in business?
    ii. Are they a registered Financial Services Provider (FSP)?
    iii. Check the institution’s ratings and online reviews to get an idea of how others have experienced partnering with the institution.

  2. Understand the requirements for alternative financing
    Research and understand the different financing options available and which would work best for your business type, industry and cash flow needs.

    Questions to ask when analysing alternative financing options:

    • What are the costs associated with this form of financing such as interest repayments, fee structures and other lending costs?
    • What are the payment terms of the funding instrument? For example, are payments required monthly, quarterly or annually?
    • What kind of interest does this type of financing acquire? For example, is the interest earned on payments simple interest or compound interest?
    It’s vital to select a form of financing that best suits your type of business and the industry in which it operates, as you will essentially be partnering with an alternative financier for the duration of your business relationship.

  3. Make sure you have the necessary documents

    It’s important to know what documents are needed and to have them ready and available for lenders.

    Typical documents and information required by alternative financiers include but are not limited to:

    • The company’s business plan (especially if you are a relatively new business) and company details such as length of operation.
    • Financial statement’s detailing the business’s assets, liabilities, annual and monthly turnover, as well as cash flow details, etc.
    • Three months of company bank statements.
    • Tax returns.
    • Type of collateral which will depend on the kind of funding you are applying for.
    • Information on the business decision-makers such as the owners, partners, etc.

  4. Document your business’s credit history

    Your company’s credit history is one of the first things an alternative financier will look at, as they want to be sure that you are a ‘good investment.’ A business’s credit history is a good indicator of whether or not a company will meet its financial obligations and is responsible when lending money from others. The better your business’s credit rating, the quicker and easier you will be able to attain financing.

  5. Keep detailed information regarding the credit and payments of your customers

    Often businesses find themselves applying for alternative financing as a result of instituting long-term payment terms for their customers, which has resulted in restricted cash flow. As a result, when a business applies for alternative financing it is essential to have detailed records in place to show the creditworthiness of its customers, especially if using its debtors’ book as collateral.

  6. Once you have selected your alternative financier and have all the required documents, you are ready to apply and get the cash flow you need to take your business to the next level.

    By using an alternative funding such as factoring, you get the funding you need when you need it. Factoring provides your company with fast and flexible access to working capital, against your accounts receivable and alleviates pressure by providing you with the working capital you need to run your business, grow your sales and much more.

    Merchant Factors is an independent factoring company with over 31 years of experience in delivering tailored business finance solutions to businesses big and small.

    For fast, flexible business finance – contact Merchant Factors today.

    Finance beyond the Numbers.