[ T HO U G H T LE AD ER SHIP ARTIC L E ]
SME financing 101:
Knowing your options is key to survival By Jeremy Lang, Executive Director at Business Partners Limited The proposed financing agreement must ensure a fair deal for both the entrepreneur and investor.
Accessible financing is key to the survival of SMEs, which will also assist with South Africa’s economic recovery. Yet a lack of awareness around available financing and a lack of business compliance and knowledge are proving to be a significant barrier to SMEs accessing the support they need.
Seek additional specialist input
Financiers have become strong advocates of SMEs, especially over this challenging period. There is a strong correlation between a business’s success when it receives financing along with technical assistance and mentorship. Experts can help SMEs avoid costly mistakes and improve the processes within their businesses.
New institutions and types of financing are introduced each year and there are a host of financing products available from the private and public sectors. This financing mainly consists of risk-free finance such as grants and risk-based finance such as debt or equity investments. Funders include commercial institutions such as banks and SME-focused financing institutions, development finance institutions, angel investors, crowd funders, enterprise development funders and private equity firms. At present, there are also relief programmes specifically designed to help SMEs weather the COVID-19 storm.
Before applying for financing, SMEs should consider a few factors: Get your ducks in a row
Most financiers require 12-24 month projections. They need a clear understanding of how further expenditure will produce better income for the business, which is why it is vital to detail how the business loan will be spent and how this will influence the projections. Strict criteria for most finance applications require statutory compliance and up-to-date financial statements. Therefore, it is imperative to make sure that the administrative function of the business is well managed.
Determine the life stage of your business
Each financing option has different features that can benefit businesses at varying life stages.
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Jeremy Lang, Executive Director at Business Partners The younger the business, the more difficult it is to source financing due to the higher risk to the financier. This is why many entrepreneurs rely on family or friends for funding to open or expand their businesses. As businesses grow and mature, they may require more capital to maintain business operations. With a lower risk profile, more financing options become available.
Customise every application
The local financing landscape can be tricky to navigate because different financiers have different mandates and objectives when it comes to social impact, employment or commercial returns. Generic applications may result in a higher failure rate. It therefore pays to do your research on all potential financiers to determine whether your business matches their specific criteria and investment preferences.
The good news is that although the lending criteria of financiers and banks have become increasingly stringent over the years, interest rates are currently low in South Africa, with reduced monthly instalments, increasing affordability for SMEs. While it might seem like you are out of options, financing is still available for SMEs. It’s just a matter of finding the right financing fit and knowing the best approach to increase your chances.
About Business Partners Ltd.
Business Partners Limited (BUSINESS/ PARTNERS) is a specialist risk finance company for formal small and medium owner-managed businesses in South Africa and selected African countries. The company actively supports entrepreneurial growth by providing financing from R500 000 to R50 million, specialist sectoral knowledge, business premises and added-value services for viable small and medium businesses. Since its establishment in 1981, BUSINESS/PARTNERS has provided business finance worth more than R19.5 billion in over 71 600 transactions facilitating over 651 000 jobs. BUSINESS/PARTNERS was named the 2019 Gold winner in the SME Bank of the Year – Africa category at the recent Global SME Finance Awards.
