SMEs: How to access finance

Three of the major hurdles facing entrepreneurs are getting a new business venture started, making it sustainable, and then being able to grow the business when opportunity comes knocking.  A key challenge during each of these phases is the entrepreneur’s ability to access finance, according to Standard Bank. 

“There are various options that aspiring or existing business owners can pursue when it comes to finance,” said Ravi Govender, head of small enterprises at Standard Bank. “The options depend on what is most suitable for the business itself, as well as at the different stages of the business’ lifecycle.”

The two main options to consider, Govender says, are borrowing money from your bank or selling some of the equity in the business to investors in return for a capital injection. “Both options have their advantages and disadvantages,” he said. 

“It is worthwhile for someone approaching a bank to remember that if they pay attention to the ‘5 C’s’ of small business lending, the chances of being granted a loan are increased,” said Govender.

Essentially, banks need to be comfortable with:
– The character of the entrepreneur and the management team.
– A business’s credit score, as a good credit history means that the business is run well and its financial obligations are met. 
– The capacity of the business owner to meet monthly loan repayments.
– Whether all, or a portion of, the capital in a business belongs to the owner. An owner who has invested his or her own money into the business is personally invested in its success.
– Collateral being available to provide security for the loan.

“Borrowing money has a lot of advantages for businesses,” said Govender. “Although interest has to be paid on the capital borrowed, it is predictable and the interest paid on a loan is tax deductible.”

“At the other end of the scale is raising money from equity investors,” said Govender. “This is usually most attractive when a business is in the start-up phase, as it eliminates the large expense of loan repayments.”

“An additional benefit of equity financing is also the expertise and access to resources that the right investors can provide. However, these benefits have to be balanced with the fact that ownership is diluted and control can therefore be lost over a portion of the business,” said Govender. 

Other avenues of funding growth depend largely on the particular lifecycle that the business is in. Small companies with little collateral and no track record usually have to rely on additional capital being supplied by the owner, or someone who backs the owner and is not too concerned with receiving immediate returns on their investment (angel investors).

High growth potential and a limited track record can open up finance opportunities with venture capital, business loans and mezzanine financing as well as trade credit.

“As a business matures and grows, so other avenues of raising capital become available,” said Govender. “The ultimate goal for any business, and one many entrepreneurs aspire to, is seeing their businesses listed on the stock exchange and members of the public providing capital to fund future growth.”