Small and medium enterprises (SMEs) are other companies or partnerships that fall below the criteria defined for corporates. Individual banks have different definitions of what constitutes a corporate customer rather than an SME. A separate small and medium size enterprise division usually handles smaller companies, and the smaller companies may well be included within retail banking.
There is no hard and fast definition of an SME. Banks, however, generally regard loans to the SME segment as higher risk than loans to corporates. Large corporates are usually tracked by credit rating agencies such as Moody’s and Standard and Poor’s. Corporates usually have alternative ways to raise finance, such as equity and bond issues, other than borrowing from banks. This combination of perceived higher risk and lack of alternatives means that most SMEs are charged more for loans than larger corporates.
Small companies frequently find that larger suppliers demand shorter payment terms, and may even require cash on delivery, but that their larger customers insist on longer credit terms. This pushes up the need for working capital. Successful expanding companies usually find that working capital requirements grow rapidly, most SMEs have no option other than to turn to banks to meet these financing requirements.
Start-ups frequently find that trying to get a loan from a bank is like trying to get blood out of a stone. Most banks insist on a minimum of three years’ audited accounts before they will consider making a loan. Many start-ups fail and banks find it difficult to price the risk of failure in the absence of any operating track record. This means that most start-ups have to rely on equity, and possibly venture capital, for all of their funding requirements.