The 5 benefits of investing in SMEs

Close your eyes and think about investing. Most people’s minds go to the big companies listed on the American stock market, such as Tesla, Amazon or Apple. However, this is a distant concept when investment is much closer. It is present in our daily lives. It can be seen in the streets we walk down and in the stores, we visit. How can we participate in it? One of the simplest ways is to invest in SMEs.

This term was coined to bring together small and medium-sized enterprises, which are indispensable to the business fabric of any country. But what criteria make the difference between them?

Companies with fewer than ten employees and a turnover of fewer than two million euros fall into the category of microenterprises. If they have between ten and fifty employees on the payroll and their turnover is less than ten million, we are talking about small companies. Finally, if the firm has between fifty and two hundred and fifty employees, and its annual turnover does not exceed fifty million euros, it is a medium-sized company.

According to the Strategic Framework for SME Policy 2030, these organizations hold a dominant position in the market. More than 99% of companies in Spain are considered SMEs. Furthermore, the report adds that they are responsible for creating 66% of the country’s jobs.

What are the advantages of investing in SMEs, and why is it preferable to direct capital toward these initiatives rather than toward large multinationals?

1. Investing in SMEs means investing in people in the real economy

Large corporations generate a lot of employment. Hundreds and thousands of people work on their payrolls, and hundreds and thousands of families depend on their salaries. These kinds of organizations have immense turnovers; consequently, their aspirations can be much more ambitious. Therefore, many savers fall for the magnitude of their data and scramble to invest in them.

However, financing multinationals often means sending money out of the country. And in general, these investments fatten the pockets of top management, with no impact on the families working in the company. It is tempting to bet on the winning horse, but this only widens the inequality gap between the various players in the market.

Investing in SMEs, on the other hand, means promoting equal opportunities. In this way, savers contribute their grain of sand to the construction of a more equitable financial system and, most importantly, promote employment and wealth at the local level.

Investing in SMEs means allowing your family member, friend or neighbor to launch or maintain a business. And it positively impacts the families we pass on the street.

In recent years, there has been a growing trend to go for local businesses and buy local products. After all, these were the ones most damaged by the pandemic. Although this is very positive, it is incongruous, for example, to buy local goods and then invest in large companies.

2. It is an engine to drive the progress of society

Investing in SMEs means supporting the development of new ideas. Unfortunately, many people with innovative ideas do not have the financial resources to implement them. How many inventions have not prospered throughout history simply because their creator lacked the means to make them a reality?

Today, it is much easier for a person with a pioneering idea to bring it to fruition. But there are still many obstacles in their way. Nevertheless, investing in SMEs creates a breeding ground and an economic environment favorable to the emergence of transformative initiatives.

In this way, savers succeed in building a society that embraces innovation. By contrast, if only established organizations are financed, this progress will stagnate considerably.

Investors can also monitor the use of their money and see firsthand how their wealth is positively impacting the world. And this generates a sense of satisfaction whose value is priceless.

Investing in SMEs helps to diversify the investment portfolio and minimize risk

3. Investment returns can be excellent

One of the most widespread preconceptions about finance is that only large corporations with expensive shares offer a substantial economic benefit to their investors. Unfortunately, nothing could be further from the truth.

Generally speaking, the size of an organization bears no relation to its profitability. But, nowadays, any crisis or scandal can plummet the shares of any firm, causing millions of dollars in losses for all its investors.

Moreover, many of these companies were born in garages before leading the stock market indexes. The visionaries who saw their potential and decided to support them financially were later rewarded handsomely. Investing in SMEs works similarly.

If the project is successful, the returns for investors will be very significant. And even if you invest in the company in the short term, the interest rate could be higher than in conventional investment channels.

4. Flexibility in terms of the transaction

If traditional channels are used to invest equity, the saver’s freedom to determine the terms and conditions will be very restricted. In these situations, the financial institution itself is in charge of establishing the repayment term or the interest rate. As a result, these firms assume a dominant position and the investor is limited to accepting the requirements.

However, investing in SMEs brings with it a very substantial increase in flexibility in these parameters. Now, the saver can negotiate with the company on aspects such as the amount or interest rate of the transaction. And, if he is not happy with the conditions presented by one firm, he can look for another that suits his needs.

The emergence of alternative financing platforms has made this search much easier. Through these online channels, businesses can, for example, upload their invoices, which are audited and published on the platform. Thus, people who decide to finance invoices to obtain a return on their savings find them easily.

The role of these entities is crucial, as they centralize these tasks and play the role of intermediaries between savers and businesses. Moreover, unlike other investment channels, they guarantee security and normally work in the short term. Therefore, the saver will not have to wait years to receive a profit but will enjoy a return on his investment within a few months.

5. Diversification of the investment portfolio

Every investment involves a certain amount of risk. This is one of the basic principles of the world of finance. Fortunately, several mechanisms help the saver reduce this risk level without sacrificing profitability.

The more spread out your investments are, the less risk you face of loss. However, focusing all the assets in a single company is a critical mistake. If it suffers a bad run that is reflected in its capitalization, the investor could lose a large part of his money.

Investing in SMEs and sustainable initiatives allows savers to spread their capital across various companies. This way, even if one makes a loss and does not return a profit, the other companies will act as a cushion. Thanks to this diversification, the impact of this fall in your portfolio will be cushioned since the profits of the others will compensate for the loss.

In short, people who decide to invest in SMEs to obtain an economic benefit contribute to equal opportunities and the progress of society and enjoy a lower level of risk and higher profitability.

These are advantages that all savers who operate in Inversa Invoice Market are already benefiting from.

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