A 2018 report by SME South Africa, assessing the country’s SME landscape, indicates that 94% of SME owners opted for non-government funding. Half received funding through private/personal/family means, whereas 20% received financing from one of the big banks.

Venture capital accounted for 9%, and debt financing 8%. Business owners who opted for government funding received it in the form of grants, tax incentives, loans and equity finance options. Funding should ideally act as an enabler, notes Mbulelo Mpofana, co-founder of InvestSure, a fintech start-up that secured R9.6 million in its first round of funding earlier this year. Great financiers bring additional expertise, networks and experience to the business, he says.

SMEs need working capital for anything that will drive the growth of their business (hiring more employees, buying new equipment, refurbishing stores, purchasing more stock, and so on) as well as for marketing purposes. And these plans don’t necessarily have to be elaborate, explains Dov Girnun, founder and CEO of Merchant Capital, but each funding step is crucial to the next. ‘According to funding life cycles, this is often a 10-year plan. But instead of being locked into a 10-year loan, working capital should be flexible, as it is the “air” small businesses need to breathe during their transition and growth stages,’ he says.

Shane Curran, co-founder at InvestSure, says business owners must first come to terms with the different forms of financing mechanisms in their industry, and why this is the preferred route. Work out the total cost of the financing to the business and weigh it against the benefits of each option before making a final decision, he advises. Then look at new entrants to the SME financing market who might understand the business better than traditional financiers. This could allow SME owners to access more suitable types of funding. ‘Bootstrap as far as possible, as this will help you raise funding on the best possible terms,’ says Curran. ‘Lastly, look carefully at how much outside financing you really need.’

He cautions that when looking for financing it is often a case of the cart before the horse. Business owners should first test the product or idea on a small scale and plan meticulously on how the funds will be used, so they can execute immediately once financing is secured. ‘This includes having a task-by-task layout of what you need to do when you receive funding, and then actually doing it,’ he says. ‘A lot of the set-up work can be done before you get financing, and you should do as much of that as possible.’

Nirmala Reddy, senior manager of enterprise development at Nedbank Business Banking, explains that Nedbank’s range of options is designed to provide easier access to finance, and accommodate the business owner where possible. They include a term loan, overdraft, debtor financing, vehicle and asset finance, and property finance. The bank also offers support services besides pure financing services, which fall under its Banking & Beyond umbrella.

A ‘money manager’ service assists with budgeting and tracking for individuals and small businesses, while SimplyBiz is a resource, support and network centre that helps business owners through their growth journey. Nedbank also offers the Ultimate Business Companion, a compilation of tools and templates as well as guidance on how to put together a business plan, cash-flow projections, HR and other essentials of the business.

Moreover, a guide provided by the bank includes a how-to on business basics, such as registering a business, and ensuring financial information is up to date. Other services include the Small Business Index, which provides quarterly insights on small business trends and challenges, behaviour and overall confidence levels; and Business Incubation, which gives businesses access to acceleration options, training, and access to specialist support and mentorship via Nedbank’s enterprise development offering.

Reddy says that business owners must ask themselves the following questions before looking for funding. ‘Is the business registered and are the regulatory processes and documentation in place? Do you have a comprehensive business plan with supporting financials/projections? Do you have the necessary technical industry expertise? How much funding do you need and what will you use it for?’ Finally, she adds, ensure you have contracts and letters of intent to support your request for funding.

An obvious question that every business owner should be acutely aware of is: ‘Can you afford it?’ It is evident that, along with funding, businesses also need guidance through some very murky waters during the first few years of operation. ‘Non-financial support is invaluable in providing a platform for SMEs to embark on growth strategies, product development, diversification and other such strategies that would otherwise be a risk if they were not in this supportive environment,’ says Reddy.

Of the 1 157 SME owners surveyed in the SME landscape report, 33% said they have previously been refused funding, which indicates a lack of basic business knowledge. Many owners are evidently unaware of what is required to qualify for funding, including the bare essentials, such as a healthy operating history and adequate cash flow. Reddy explains that if an external party is putting together the business plan, the business owner must ensure they have a good understanding of the plan and the supporting financials. They must also ensure that the numbers are up-to-date and be realistic in their projections and expectations.

During the application process, a bank would scrutinise the track records of the business, the business owner and management team (including their expertise and industry knowledge), business viability and the propensity for long-term growth and job creation, she says.

Miguel da Silva, MD of funding at SME funder Retail Capital, says the company was a first-mover in offering financing in the form of a merchant cash advance on the back of a business’ credit and debit card takings. The repayments are linked to daily turnover, therefore matching the repayments to the cash-flow cycles of the business. Alternatively, asset-backed financing, and invoice discounting, whereby the funder buys a business’ future invoice for a fee, are also available to SMEs. And to repeat the mantra of guidance with finance, Da Silva says the company’s partnership with SMEs includes free account set-up, social media support and business consulting.

The contraction in the SA economy has seen investors and conventional credit providers pull back on lending. ‘If credit provision for large corporates is being restricted, you can only imagine what is happening to businesses that have typically been fragile,’ he says. ‘The focus should be on empowering the entrepreneur and expanding their perspective when they think about access to funding.’

He adds that while Stats SA liquidation figures for SMEs are up 53% year-on-year, Retail Capital has not seen an apparent increase in write-offs on its portfolio, which he attributes to its business guidance and support structure. According to Girnun of Merchant Capital, often the best financing options for businesses that are starting out are private equity, capital from friends or family, and banking finance. Otherwise, if the business has a track record of successful operation of more than a year, Merchant Capital can provide a merchant cash advance. However, if the company operates outside of the retail sector (say construction or logistics), bank finance, an overdraft or a secured loan may be an option as there are existing assets, which may qualify as collateral, he explains.

‘We can see a direct parallel between the general health of the country and what is happening in the real economy,’ says Vusi Thembekwayo, venture capitalist and CEO of MyGrowthFund. ‘This environment informs the sustainability and buoyancy of the economy, the country and the political landscape.’ SMEs, with their innovators and disruptors, feed into and direct the next moves of the large corporations at the top of the industry pillars, he adds.

‘If longevity and future-proofing are at the forefront of a corporate strategy, it should be involved in, and care deeply about, the vigour of the SME landscape, as it is here where true innovation moves economies and industries forward.’

By Sven Hugo
Image: Gallo/Getty Images