Category Banking

Securing finance: bridging the expectations gap between SMMEs and financial institutions

30 May 2011 Growthpoint Properties

Risk versus reward: a ratio that often works against South African entrepreneurs when it comes to securing finance for their SMMEs (small, medium and micro enterprises). With a perceived “shortage” of ready finance available to local start-ups, Shawn Theunissen, head of Corporate Social Responsibility (CSR) at Growthpoint Properties and Property Point (Growthpoint Properties’ enterprise development programme), maintains that finding a solution has to do with assisting entrepreneurs to better understand the role of finance in their businesses, and giving them the means to manage it appropriately. If SMMEs have viable operating models in place prior to approaching finance institutions, and can clearly define the innovation and value of their idea, they stand a far better opportunity of securing finance...

Having a reliable source of finance is a critical aspect of any business’ continuity – even more so when one is operating a start-up. Between investing in infrastructure and various assets, procuring services and financing the day-to-day operations of one’s business, entrepreneurs typically find their cash reserves and resources stretched to the limit repeatedly, especially during the first two years of their existence. For many entrepreneurs, the immediate solution to this challenge is to try and secure finance through a traditional source such as a bank or other financial institution. What most don’t realise however, is that, in this instance, funding might very well be declined due to a clear mismatch between their and the potential financier’s objectives.

When it comes to applying for finance, Property Point’s experience as an enterprise incubator has shown that most SMMEs do not have the requisite business models to support and make use of the very funding they are trying to access. Instead of having an operational model in place which allows the business “to do business”, many SMMEs rather try to access money to put the model in place. In cases where the business is capital-intensive, this is understandable, and something that a financier will take into consideration. In cases where it isn’t, the entrepreneur has effectively failed to prove the “business case” for financing: if the SMME isn’t operational it cannot make money. If it cannot make money, it cannot repay the financier’s loan. Entrepreneurs walking into financial institutions thus need to appreciate the difference between paying for the business’ operations (i.e. all the set-up costs) and paying for the business to operate (i.e. assisting it to do business and generate cash flow). If you cannot prove how the loan will enable the latter, it would be preferable that you rethink your proposal before meeting with a consultant.

Having the right operational model in place goes beyond “doing business” however. It also means that an entrepreneur must have the resources and skills available to make the best possible use of the loan. Again, based on our experience, we have seen cases where loans become burdens as opposed to enablers in certain small businesses. This is usually due to a lack of financial experience and accountability, with entrepreneurs either being too scared to use the money, or using it very sparingly or inappropriately (either suddenly investing in company cars for example, or as a form of cash injection instead of chasing debtors etc.). Without knowing how to use financial products, access to these can become a moot point in many instances, with poor cash flow being confused with a lack of funding and funding opportunities.

As an enterprise incubator that initially provided funding to select SMMEs, Property Point revised its intervention model when it became clear that we could potentially provide entrepreneurs with more valuable assistance by rather helping them put an operational model in place, as well as equipping them with the financial skills they need to run their businesses themselves. Our business support service thus works to develop an operational model that will assist the SMME to achieve growth, and get it to a point where it is operationally ready to make use of funding. In terms of financial accountability, we are very conscious of the fact that every business owner needs to understand the finance basics. This is not a responsibility that we believe can or should be outsourced by entrepreneurs. One of Property Point’s core training modules thus deals specifically with the SMME’s wealth creation plan. We will additionally be requiring new participants in our programme this year to invest in the programme themselves. (This nominal amount will then be pooled and used as a source of asset finance for select businesses towards the end of the programme.)

We also work very closely with our entrepreneurs to address another crucial aspect in terms of securing funding, namely that of proving their unique selling point: that critical factor that will differentiate them and ensure their success in a cluttered market. What many entrepreneurs fail to appreciate is that there is no shortage of business proposals for financiers to consider. With more and more South Africans effectively forced into survivalist entrepreneurship in many instances, funding institutions are (and naturally so) reticent to finance SMMEs that will end up competing in the same market. They’re looking for the next Mark Shuttleworth: someone who has seen a unique opportunity and can leverage this. Unless an SMME can prove that it isn’t the same as all the others before it in the queue and that there is something that will give it a distinct and sustained edge in the market, it runs the risk of submitting a “generic” funding proposal. This is something they need to consider even before they set up their initial operation.

In conclusion, while many might argue that securing finance remains very much a chicken and egg dilemma for SMMEs in South Africa, we would recommend that entrepreneurs wanting to access loans need to make their own businesses the starting point for their applications. By working to understand the expectations of financiers, they will be able to deliver on these in their initial applications: proving that their business is operational, that they have the skills to manage finances and, ultimately, that they have that “unique” something that will set their business apart. In this way, they will stand a far better chance of not only accessing the finance they require, but of using it to make a sustainable success of their business.

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