SMEs take different steps to boost business, from selling equity to raising capital. However, any financial disruption, like that induced by the pandemic. could prevent an SME’s growth. To weather market disruptions and raise capital, SMEs rely on external support. A third party that offers equity capital markets (ECM) support can help SMEs generate capital even during dry periods.
Understanding ECM support services
ECMs are markets where financial institutions help organisations raise capital. Companies trade stocks only in the ECM. The ECM is broader than the stock market and includes many financial institutions that play a vital. Without support from financial institutions, a business may not discover new ways of generating capital or trading stocks. Both the primary and secondary markets are included in the ECM. In short, the ECM refers to a network of financial institutions and channels that helps businesses generate capital.
IPOs, private placements, futures, contracts, stock trading, and other forms of raising capital come under the ECM, as do processes such as derivatives trading and book building. Brokers, angel investors, retail investors and venture capitalists are also essential to the ECM. SMEs need the ECM more than do any other organisation, because they need capital to grow their business and would look to sell equity/ownership in exchange for it.
Benefits of ECM support services for SMEs
SMEs may not have the expertise to engage with ECMs and look to financial institutions or advisory firms for support. The pandemic affected them adversely, and they struggling to recapitalise balance sheets and achieve long-term goals. Sales were affected, impacting return on investment. ECM support from a reputed third party would help not only with generating capital, but also with research activities. The benefits of ECM services for SMEs are as follows:
Minimise the debt-to-equity ratio
SMEs can raise capital from the ECM or the debt market. The debt market provides finance immediately, but results in the company having debt on its books. If the debt is not paid on time, it would find it difficult to maintain operations. Choosing the debt market reduces an SME’s financial leverage ratio.
The debt-to-equity ratio is calculated by comparing a company’s liabilities with its shareholders’ equity. When a company raises capital in the ECM, it has a lower debt-to-equity ratio. The debt-to-equity ratio is an important metric that helps assess a company’s financial health.
Provide access to more financing options
Sometimes, an IPO may not work for an SME. An SME my also fail to raise capital from private placements. With the ECM, SMEs have a wide range of financing options to choose from. For example, it could trade in derivatives, stocks, futures and many other products to generate capital. A reliable ECM support firm could help SMEs look for the best financing options.
Provide access to increased experience
Companies that offer ECM support services also provide access to experience, as do angel or retail investors who will use their expertise to boost growth of the SME.
