Latin American Capital Markets

ACCESS TO FINANCING FOR SMALL AND MEDIUM ENTERPRISES 397Table 12-2 I Sources of Financing for Small and Medium EnterprisesFinancing sourceDebt financing sourceCommercial banksCommercial financecompaniesLeasing companiesGovernment, public fundinginstitutions, and developmentagenciesTrade credit andconsortiumsEquity financing sourcePrivate investorsFinancing characteristicsSmaller companies are likely to obtain financing after their start-upphase from commercial banks.The bank will closely examine creditrating, collateral, ability to repay the loan, nature of the business,management team, competition, industry trends, and strategy.Companies that cannot obtain a loan from a commercial bank turnto commercial finance companies because they usually have moreflexible lending policies and they might be more willing to take risksgreater than those of traditional commercial banks.These companieshave higher rates than those of institutional lenders, but in manycases companies can negotiate lower rates if they are willing to makeuse of other chargeable services of the finance company.Leasing companies are the source of debt finance for purchasingassets. Instead of borrowing money, enterprises can "rent" money topurchase equipment in the form of either operating or capital leasing.Operating lease includes the money to purchase the asset and aservice contract for a certain period of time (usually shorter than theactual useful lifetime of the asset). Operating leases can be canceledwith no or a very little penalty. A capital lease differs from an operatinglease in that it usually does not include a maintenance contractand involves the use of the purchased equipment over the asset's fulluseful life.There are many public sector entities that offer direct capital orrelated assistance to SMEs.The lending strategies and conditions ofthese institutions differ in many ways.Suppliers often have a strong interest in the growth and developmentof their customers and are willing to provide favorable trade-creditterms or even direct financing to them in order to accelerate theirgrowth.The same principle applies to the customers of a growingcompany who rely on the company as a key supplier Customerrelatedfinancing often appears in consortiums.Private investors often provide equity capital to early-stage companies.These investors are called "angels" or "bands of angels" and are becomingincreasingly important as a form of private equity financing.(Table continues on next page)Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub