Small and medium sized businesses often fail to secure the finance to capitalise their businesses because of poor record keeping and misalignment between the financing facilities they opt for and the growth stage of their businesses, a panel of financing experts told delegates at the virtual I AM AN ENTREPRENEUR summit held recently.
The summit, which was held under the theme: Raising Capital for Recovery and Growth, was addressed by a panel of experts from First National Bank, the headline sponsor of I AM AN ENTREPRENEUR summits, venture capital company Sanari Capital and a small and medium sized financier Tysys Capital Group.
The digital summit was hosted at an opportune time as small and medium sized businesses are the hardest hit by the outbreak of the coronavirus. According to the results of a rapid response survey conducted by StatsSA, four in ten businesses feel that they cannot continue to operate, almost half of respondent businesses have temporarily closed their doors and five in six businesses have experienced a drop in turnover.
Precious Majola, Commercial Business Manager at FNB, said lenders at each stage of the business cycle will apply different assessments and have different expectations on their return on investment as each phase in the evolution of the business presents its own risks and opportunities.
“Our experience has shown us that many small and medium sized businesses don’t keep reliable and accurate financial records. Keeping a clean credit history, ensuring a consistent inflow of money into the account, and separating personal account from your business is a ticket to the game. Banks, like any other investor, want to mitigate their exposure to risk. So it is also crucial that the business can demonstrate that they pay the taxman, the business does not have any judgement on record, they pay their bills on time and the business generates an income that can enable it to repay the loan,” said Majola.
She stressed that banks do not have a one-size-fits-all approach when it comes to financing businesses, instead different financing options are tailored for different phases in the growth stage of the business.
“There are business revolving loans such as an overdraft or a credit card to cover day to day expenses, PO financing to those enterprises that have a valid purchase order but don’t have the necessary funds to operationalise that transaction and selective invoice discounting, to discount the invoice that is still awaiting a 30, 60 or 90 day payment cycle,” said Majola.
Keitumetse Lekaba, SME Funding Specialist at Tysys Capital Group, told delegates that Enterprise & Supplier Development (ESD) is one of the most viable financing options available to small and medium sized companies. However, she pointed out that many emerging enterprises fail to reap the full benefits of this form of business financing because they adopt a spray and pray approach.
“Often SMEs use a blanket search for funding especially for ESD. As a business that is considering this form of financing, you need to be very clear and concise about what your funding requirements are and what your strategy is, whether the company you are applying to is in the same sector and what corporates are your best fit.
Ideally you need to look for ESD funding in companies and sectors that will benefit your business beyond just the funding by looking for corporates that match your company’s growth strategy and long-term vision. By doing this due diligence, SMEs will be able to zone in on companies that complement their businesses and will be well positioned to benefit from the supply chain by being considered for RFQs and contracts,” said Lekaba.
She told delegates that it is crucial to research upfront if their funding requirements will be catered for by the ESD programme before they can even apply. “For example, most companies don’t fund working capital such as payment of salaries and operational expenses.”
Lekaba encouraged SMEs applying for ESD funding to work on their profiles and be explicit about their requirements. “This is where many companies fail – if the first page on your profile doesn’t give the potential funder a clear idea about what your company is all about, you are already on the back foot. It is important for businesses applying for ESD funding to keep it simple yet be explicit about what they want.
They can supplement their application with documentation such as letters of intent, outline the milestones their company has achieved and where applicable, stipulate how they intend to pay back the grant. You need to work on your own business sustainability. No one wants to give you a grant today and the business is bust in six months,” said Lekaba.
Samantha Pokroy and Moushmi Patel from institutional investor company Sanari Capital, also shared some valuable insights on what potential investors like venture capitalists and private equity firms consider before they can buy equity in a company.
“Potential investors will always look for financial and management accounts that are reliable, accurate and complete. This gives them the ability to have a clean line of sight about their prospects to get a return on their investment. In addition, investors also look for companies with a niche focus and market as this gives them the competitive edge. An added bonus is companies that offer products or services that are different in some shape or form, for example via an IP, as this creates the barriers for entry and makes it difficult for competitors to replicate the product or service,” said Pokroy.
Patel cautioned businesses that are considering selling an equity stake to a venture capitalist or investor to ensure that there is alignment between their goals and that of the prospective investor.
“It is important to know your investors and understand their long-term horizon and ensure that they share the same aspirations and vision for your business. It is therefore advisable to have those courageous conversations with the potential investor upfront and solicit advise if you are doing this for the first time. You need to remember that you are dealing with investors who do this on a daily basis,” said Patel.
Pokroy and Patel explained the three industry formulas that prospective investors use to make an investment decision, namely TAM, which refers to the Total Addressable Market – this describes how big is the largest possible market; SAM which stands for Serviceable Available Market. This refers to what proportion of that market fits you. The last one is SOM, which denotes Serviceable Obtainable Market, which indicates what proportion of that market can you reach.
This article was first published on https://iamanentrepreneur.co.za/news/smes-urged-to-get-their-houses-in-order/ on 8 September 2020