Debt instruments for funding SMEs

In this technical note, we aim to provide an overview of the various financial products that companies use to raise funding. For small companies, funding in the debt or equity financial markets is often not an accessible funding route because buyers of bonds or shares usually want these securities to be listed on a market so that they have a certain degree of liquidity. This means that securities of a relatively large size must be issued, which is beyond the possibilities and needs of a small- or medium-sized enterprise. Therefore, the almost exclusive source of debt funding for SMEs is bank funding. The short-term bank funding products we will discuss are bank credit, invoice advances, invoice discounting, factoring, and reverse factoring. We will also briefly look at credit insurance. Long-term bank funding can take the form of loans, equity loans, mezzanine debt, leasing, and renting.