Over the past 18 months, we have spent a significant amount of time looking at the “Access to Funding” and “Access to Markets” challenges for SMEs and one of the key takeaways from the “Funding” side is the importance of surviving “Year 1”.
Failure rates for SMEs are well documented across the globe and South Africa has some of the highest due to various legacy structural economic issues as well as well as a weak domestic economy.
Day after day, we receive requests for funding from entrepreneurs. This might take the form of:
- Grant Funding (Black Industrialist / Agro-Processing / R&D Grants)
- Debtor / Trade Finance
- Contract / Tender / Purchase Order Financing
- Short-term working capital solutions
Very often, these applications are rejected – or don’t even come up for consideration – for a single reason: The applicants haven’t been in business for a year.
Why does this matter?
Business credit scoring systems in South Africa remain relatively under-developed and this means that immature businesses (under 1 year) are perceived as higher risk, simply because there isn’t enough data to show how much money is going through the business banking accounts.
For example, try and secure a company credit card for a new business. You’ll find that banks won’t even consider issuing a card to you until you have traded for a year. Conversely, try and apply in your personal capacity and you will find that the banks will be keen to see how they can assist you – why? Because they have your trading history well established.
Many SME owners also play “fast and loose” combining business and personal finances and this means that they will then have to look at personal credit scores before considering lending capital to SMEs.
While the auditing profession has come in for some criticism over the past couple of years, financiers still attach a significant amount of value to audited financial statements. They want to know that an independent set of eyes has looked at the finances of the business and have checked the cash balances and the invoices going through the business.
The simple step of producing audited financial statements will be perceived as a sign of maturity in the eyes of a funder.
For many ambitious SMEs, this can be an incredibly frustrating period as they want to grow their business but are denied access to business lending facilities which could kickstart their growth.
The lending environment for SMEs in South Africa is still in its infancy and there is very little support for businesses that have yet to complete a full year of trading.
For SMEs who fall into this space, focus on developing your “Access to Markets” rather than “Access to Finance”. Your customers will be your cheapest source of funding during this period.
If finance is a critical aspect for your business, you might want to consider a “merger” with a more established company with a longer track record or to reverse your assets into an existing operation.
Try and show regular and consistent cash-flows through your business banking account and get your audited financial statements out quickly at the end of your first financial year.The moment you have these documents and a year of trading history, a number of new avenues will open up for you.