As it is commonly known, lending from banks is the main source of external finance for SMEs and entrepreneurs. These methods are mainly used to fulfill their start-up and investments needs. This method is commonly used by small business ventures but it becomes a challenge for the new, innovative, and fast-growing companies to access finances due to their high risk-return profiles.
SMEs are seeking to de-leverage as well as to improve and strengthen their capital structures. The need to de-leverage, strengthen the capital structures as well as decrease the borrowing from the banks has become urgent in the current day society so as to survive the recent economic and financial crisis. Therefore, here at Mwananchi Credit, we have come up with new approaches to providing the finances required by SMEs and new entrepreneurs. This method includes;
1. Traditional debt finance
At Mwananchi Credit, traditional debt finance includes the issuance of bank loans, overdrafts as well as using the credit lines and credit cards to access the finances needed by the SMEs. The main characteristic of this type of financing is that they have an unconditional claim on the borrowers since they are just required to pay a specified amount of interest to Mwananchi credit at fixed intervals. However, the interest may also be adjusted periodically in accordance with the reference rate. One advantage of this type of debt is that it only includes the payment of interest and the repayment principal. Also, it cannot be converted into another asset or a bank claim with high priority in case of bankruptcy.
2. Transactional lending technologies
In the contemporary world, it has been noted that for the borrower to access finances using the lending technologies, they are required to give valid information about their borrowing habits, they are required to follow the screening and the underwriting procedures, understand the loan structures as well as follow the monitoring strategies and mechanisms. Therefore, here at Mwananchi credit, we have come up with new transactional lending technologies that are primarily based on hard quantitative data. These methods include;
– Financial Statement Lending
This is a type of lending that depends on the financial strength of the borrower. The borrower is required to provide informative, valid, and reliable financial statements which are prepared in accordance with the accepted accounting standards.
Since Mwananchi Credit is an informationally transparent firm, we extend the credit to the borrower in accordance with the strength of his financial condition. This is reflected by the financial ratios such as the current ratio, debt to equity as well as return on assets ratios among others as calculated from the financial statements.
– Small business credit scoring
This type of scoring is based on the historical data of the SME owner and the firm itself. At Mwananchi credit, the method is applied to informationally opaque employees where the data collected is fed into the loan prediction model which gives the score for the loan. This approach has become very useful in our firm since it reduces the costs and the time that is spent in granting loans to the borrowers. The method is also very consistent when it comes to credit evaluation and it also focuses on difficult cases as well as the requests for large loans.
At Mwananchi Credit, the credit scoring systems are provided by the credit reference agencies in case there is no historical database available. The credit scoring provided covers both the business and the owners which is based on the credit experience and rating of the individuals.
3. Trade Credit
Trade credit is another method that is used in financing SMEs and startups. It is used in substituting or supplementing short-term bank lending. It mainly involves an extension of credit instruments such as loans and guarantees in order to sustain the export and import activities. At Mwananchi Credit, guarantees take the form of letters of credit and it consist of obligations from the bank to pay hence reducing the payment risks.
4. Asset-based financing
Some of the methods used in Asset Based Financing at Mwananchi Credit include asset-based lending, warehouse receipts, leasing, and factoring among others. This method of financing is very different from traditional debt finance since the firm will obtain the funding that they need depending on the value of the specific assets instead of their credit standing. Some of the assets that are used in securing the working capital and term loans include inventories, machinery, real estate, and trade accounts receivables among others.
The main advantage of asset-based financing is that the firm is able to access the finances that they require faster and at more flexible terms regardless of their financial position. Also, those firms that do not have their credit history are able to access the working capital within a short period of time. Additionally, Mwananchi credit which is the financier does not need any personal guarantee from the entrepreneur.
However, the costs that will be incurred are a bit higher than those incurred while getting loans from conventional banks as they will include asset appraisal, auditing, and upfront legal costs that reduce the profit levels of the firm. Also, the limit of the funds issued is a bit lower than the ones issued using traditional debt financing.
Therefore, at Mwananchi credit, we welcome our esteemed clients to borrow the money that they need in order to start their small business ventures as well as to finance the SMEs.