For most Small and Medium Enterprise (SME), funding and loans are vital to their ability to purchase equipment, expand the business and maintain cash flow through challenging times. But to maximise their chances of getting the loan, it’s vital that that they do their homework before approaching a funder.
We partnered with Absa to provide loans to SMEs based on a business’ ability to generate future cashflows.
In 2020, this saw R52.2 million in funding, which supported more than 1,000 jobs in our host communities. But contrary to popular belief, funding is not the first step for an SME.
Knowledge and tools to run their business
Having worked with many SMEs over the years, the focus must first be on mentoring and coaching entrepreneurs to give them the knowledge and tools to run their business. This is followed by ignition of partnerships that create market linkages, and only then do you look at business loan funding.
Once a small business is ready to apply for funding, there are several things they can do to improve their chances of getting the loan.
Know why you need the money
Funders want to know what impact the funds will make on the business. A clear funding need which is directly linked to the income-generating activities of the business is important.
Businesses must also be able to demonstrate the business is applying for the correct amount of funding.
Funders look for a business case that demonstrates how value can be created by the business, as this indicates the business stands a greater chance of success. It is important to have clear and documented business strategy before looking for funding.
Show how you’re going to pay back the money
Funders will want to know how and where the business generates an income. They will look at the income streams and expenses to determine the ability of the business to grow and repay loans.
A cashflow document is important, as it will show the funder that the business is able to meet its current commitments and still be able to service loan repayments.
Be transparent about your finances
Few SMEs have perfect credit and financial histories. But it’s critical to be 100% transparent with funders, and explain any issues that could negatively impact a business’ application. It’s better to provide detail upfront than having to explain along the way.
Keep your debt levels under control
Most funders will be hesitant to advance funds to a small business if it is in arrears. It pays to pay off your debt as soon as possible.
The longer you have your debt, the more you will pay on interest. As the business starts to create more equity and have a stronger balance sheet, there may be an opportunity to use its balance sheet in more effective way to fund new projects using its own resources.
The bottom line is that SMEs must be prepared before applying for loans or funding. By showing that you understand your business and have done your research, you’re in a far better position to win over a funder.
Have your business plan and cashflow statement ready and updated, seek help from mentors if needed, and make sure you borrow the right amount. Work closely with your accountant to ensure your business affairs are articulated in a manner that makes sense to a funder.