Access to finance is one of the most persistent challenges faced by small and medium-sized enterprises (SMEs) in emerging economies. Even though they are the backbone of local economies, funding options for SMEs in emerging markets often remain limited.
The World Bank estimates that the global finance gap for SMEs in developing countries exceeds $5 trillion. This gap is driven by multiple factors: weak banking infrastructure, high collateral requirements, inconsistent business cash flow and a lack of formal records. When you add macro-level instability, currency fluctuations, or ongoing post-COVID recovery pressures, it becomes clear why so many SMEs struggle to find the right kind of funding.
But businesses often overlook the following: even when funding is available, it is not always the right fit.
Not all money is equal. And accepting the wrong kind of funding too early can hurt, instead of help your business.
When funding becomes a risk instead of a solution
Some time ago, I worked with a small business in Ecuador that operates in the B2B sector. During COVID, the business had tapped into an emerging market trend and demand exploded. In less than 8 months, they had grown from local operations to national distribution. It looked like a success story.
But behind the scenes, the systems were breaking down. The business didn’t have the logistics, accounting, or people in place to handle that level of growth. Eventually, they ended up having to pause operations and scale back to regain control.
About a year later, the founder began planning a relaunch. News spread and funders started knocking on their door. All of these funders offered money in exchange for equity. To the founder, these offers were very tempting! One, because the business had already proven product-market fit and two, because the founder was concerned about adequately managing fast growth.
The founder asked for my advice. If you know me, you will know that I am cautious when it comes to external funding.
So, it won't surprise you that my first question was whether it was possible to grow the business without giving up ownership.
The approach
Together, the founder and I mapped out the financial business model, looked at the cash flow needs, defined key growth targets and assessed what kind of funding was needed to achieve the targets. We also asked hard questions, like: What kind of growth is sustainable? What operational gaps still needed to be fixed?
The outcome of the assessment was that the business did not need external funding for the next growth phase.
Based on the results of our assessment, the founder decided to focus on organic growth - by focusing on their most profitable customer segments and restructuring their operations - and politely said "No" to all the funding offers. They chose this in order to build up a stronger negotiation position for future investment discussions.
The above story is common. Many SMEs don’t know what funding options are available, or when each one makes sense. So, to help you make the right choice for your business, here is an overview of the most common types of funding, plus one that is often overlooked: your own profits.
7 funding options SMEs should understand - plus one that is often ignored
1. Government grants and subsidies
Grants and subsidies are often called “free money”. There is no repayment required and sometimes businesses also get additional support, like training or tax incentives. Governments use these instruments to promote specific sectors that they want to expand, like agriculture, manufacturing or green energy. They also use these instruments to support marginalised or underserved entrepreneurs.
But there is a catch. It is difficult to access this "free money".
Application processes can be bureaucratic and time-consuming. In many cases, you will need to submit detailed business plans, budgets and audited financial statements. Not all SMEs have this. There may also be strict rules regarding how the money can be used. And finally, most subsidies and grants require detailed reporting. In the worst case, if you make a mistake, you may be disqualified or forced to return the funds.
So, when should you choose this type of funding?
Ask yourself:
- Can we meet all the reporting and administrative requirements?
- Does the grant give us money for what we actually need (for example, working capital versus equipment)?
- Is the timeline realistic, or will the market opportunity pass before we receive the funds?
When to use? You have time to apply, can align your business activities to programme goals and don’t urgently need the money.
2. Microfinance Institutions (MFIs)
Microfinance institutions were originally created to serve micro-entrepreneurs who could not access traditional bank loans. Today, many MFIs have expanded their operations to offer loans to SMEs, especially in underserved areas. Loan sizes range from a few hundred to tens of thousands of dollars or euros.
Microfinance loans usually require less documentation than banks. Some MFIs accept community references or mobile banking records instead of formal financial statements. This makes them more accessible to businesses.
However, interest rates can be relatively high (especially if there is high inflation in your country) and loan terms are often short. Some businesses also overestimate how much they can borrow. They then end up being disappointed by small loan ceilings that don’t cover their actual investment needs.
Ask yourself:
- Do I need working capital or investment capital? Microfinance is often better suited for working capital.
- Can I manage the repayment schedule, or would I be better off with a different structure?
- What is the actual annual cost of this loan, including fees?
When to use? You need small amounts of capital quickly, have limited collateral and can repay in short cycles.
3. Angel Investors
Angel investors are individuals - often former entrepreneurs with a lot of money - who invest their own money into promising small or medium businesses. In addition to funding, they often offer mentorship, sector knowledge and access to networks.
They are very common in areas where formal venture capital is limited. You can find them through local entrepreneur circles, diaspora communities, or through angel networks.
The main advantage of an angel investment is flexibility. Angel deals can be more personalised than other types of funding. But the downside is equity dilution. You have to give away part of your company in exchange for funding. And because the relationship is personal, if you have a disagreement with an angel investor, this can also become personal. (Always make sure that you have good exit arrangements.)
Ask yourself:
- Am I ready to share decision-making and financial returns?
- Does this investor bring strategic value, or only money? If there is no strategic value, you may want to reconsider.
- Have we agreed in writing on exit expectations, roles and boundaries?
When to use? Your business is in an early growth phase, you have a scalable idea and you want strategic guidance, not just funding.
4. Bank loans
Bank loans are often seen as the “default” funding option, but this is not always the case in emerging markets. High interest rates, collateral demands and detailed paperwork mean many businesses are excluded from traditional credit systems.
Even when a bank does approve your loan, you may be asked to provide personal guarantees, mortgage your assets, or tie the loan to your property. These barriers can be very hard to overcome, especially for women or younger founders.
However, if your business has formal records, recurring revenue and a clear repayment plan, bank loans can provide relatively low-cost capital (compared to equity). If banks in your country offer the loan duration you need, they can be especially useful for long-term investments like property, equipment, or business acquisition.
Ask yourself:
- Can I meet the repayment schedule even during slow seasons?
- Is my business prepared to provide audited financials and collateral?
- Would a more flexible loan product (like from an MFI) be more realistic?
When to use? You are a formalised business with a stable cash flow and have the ability to repay over the long term.
5. Crowdfunding
Crowdfunding allows businesses to raise funds from a large group of individuals. This is usually done through online platforms. There are different models:
- Donation-based (no return given to lenders or investors)
- Reward-based (products or services offered in exchange), and
- Equity-based (small shares offered to investors).
Crowdfunding can help businesses test a product, build a loyal customer base and access small-scale capital. But success depends on visibility. If you don't have a strong marketing effort, compelling story, or existing audience, campaigns often fail.
In addition, some platforms only release the money if the campaign hits its full goal. Fees can also be high (up to 10% of what you raise) and it may take some months before the money is released.
Ask yourself:
- Does my business have the time and capacity to run a strong marketing campaign?
- Is our product compelling and understandable to a broad audience?
- Can we deliver what we promise, especially if demand exceeds expectations?
When to use? You have a consumer-facing product, an engaged audience and the capacity to promote and fulfil a campaign.
6. Venture Capital (VC)
Venture capital is designed for businesses with very high growth potential. These are usually startups that have a scalable business model. You will often find them in sectors like tech, health, or clean energy. In exchange for investment, VCs receive equity. They also usually take a seat on the board.
In emerging economies, venture capital remains limited, but it is growing. This is especially the case in East Africa, Southeast Asia and parts of Latin America. However, note that VC funding is hardly ever a good fit for traditional small and medium businesses. It is also usually not a good fit for businesses that show steady growth instead of exponential growth.
VCs expect a clear exit strategy from you. Your business must go to IPO, acquisition, or a secondary share sale within 5–7 years. This means that your business needs to show high returns in a very short timeframe. This expectation brings pressure. You may find yourself pushed into scaling faster than your systems or teams are ready for.
Ask yourself:
- Can our business scale 5–10x in the next 3–5 years?
- Are we comfortable giving investors a voice in key decisions?
- What happens if we don’t hit their growth targets?
When to use? You have a high-growth, scalable business with a proven track record, and your business is ready for investor pressure, reporting and structured governance.
7. Strategic partnerships
Strategic partnerships are a highly underrated funding option. They involve collaboration with a larger or more established business. Partnerships can provide funding as well as access to markets, distribution channels, expertise, or shared infrastructure.
Examples include:
- A small agro-processing business partnering with a supermarket chain to co-invest in packaging and logistics
- A manufacturing business entering a licensing deal with a multinational to produce under their brand
- A digital service provider working together with a telecom company to provide bundled services
These arrangements require strong negotiation and legal clarity. If expectations are misaligned, it can lead to dependency or conflicts. But when they are done right, partnerships offer growth capital and long-term benefits without diluting ownership.
Ask yourself:
- Does this partner have a genuine interest in mutual success?
- What are the risks of becoming dependent on one entity?
- Are our roles, responsibilities and financial terms clearly documented?
When to use? You want capital, market access or scale, but you prefer collaboration rather than giving up ownership.
8. Your own profits: the case for organic business growth
This is the funding source many businesses overlook: your own profits. Bootstrapping your business may give you more freedom.
Growing through retained earnings - I call this organic business growth - is not a flashy, sexy way to grow, but it is one of the most powerful ways to strengthen your business. When you reinvest your profit into systems, staff and sales, you build a business that generates value on its own terms.
Organic growth is especially effective when you focus on your Most Profitable Customers (MPCs). These are the customers who:
- Spend more
- Stay longer
- Refer others
- Are easier to serve
By identifying and serving your MPCs better, you can increase revenues without increasing costs. Explore practical ways to grow sales from your existing customers before chasing new markets. The higher profit = your growth capital.
The real power of organic business growth is that it strengthens your negotiating position. If at a later stage you decide to raise external funding, you will have a stronger financial position, a proven business model and less risk. This means that you will be required to give up less equity in return for the funding.
When to use? You want to build a self-sustaining business that shows steady growth, retains full control and avoids unnecessary debt or dilution.
Choosing the right funding option
There’s no perfect option, but there is a best-fit option for your business, based on where your buiness stands today.
This is how to make a smart decision:
1. Match funding to business stage
- If you are a startup - consider angel investors, microfinance, or small grants
- If your business shows steady growth - look at bank loans, strategic partnerships and organic business growth
- if you are expanding - research equity investors (VC or angel), mezzanine finance or international funders
2. Think beyond the money
Ask yourself, What else do I need? Market access? Mentorship? Flexibility? Speed? Choose a funding option based on your needs, not on what is being offered on the market.
3. Know your limits
Avoid overextending yourself. If you are not ready to repay debt or share equity, pause. Start by improving your profits with these core strategies and build your business first.
4. Diversify carefully
You can combine funding types (for example, profits + a small loan + a grant), but only do this if you have a clear strategy.
Conclusion: fund smart, or wait a bit
Access to finance is important. But access to the right kind of finance, at the right time, is more important.
Too many businesses rush into funding before they have built the basics: reliable revenue, strong operational systems and a solid growth model. As a result, they end up with too much debt, facing high pressure, or diluted out of their own business.
My advice will always be to first build a solid foundation. Focus on your most profitable customers and reinvest your profits. This will help your business grow faster and put you in a position to negotiate better funding terms later on. And, it will make you more attractive to funders because funders love a business that doesn’t need them to survive!
So before you take that bank loan, apply for that grant, or say yes to that investor, stop and consider your actions. First strengthen your business. And then choose funding as a tool to accelerate your growth, not as a crutch to survive.
Not Sure About Your Next Step?
Let’s figure it out together
Guide My Growth helps businesses - like yours - make smarter business decisions, especially around growth, funding and profitability. Whether you are bootstrapping or preparing to raise external finance, we can help you:
- Improve cash flow and margins
- Explore funding options on your terms
- Identify your most profitable customers (MPCs)
- Build a stronger business that attracts better opportunities
Book a free call to discuss your next move. No pressure!
