5 ways for start-ups to become credit-worthy

The SME lending landscape requires a new set of rules. Bianca Moepye, Sasfin’s first SME Loan Consultant, unpacks the unique challenges that SMEs face, how they can become funding ready and the products that Sasfin has built to support them.

SMEs and traditional lending shortfalls

Traditional lending requires businesses to be operating for at least three years and to be showing a profit. “We recognized that businesses in a growth phase with a lot of potential wouldn’t meet these criteria, as well as the fact that smaller businesses face challenges that their more established counterparts do not face,” says Bianca.

“If we want to support SME growth across South Africa, we need to give smaller businesses access to funding that takes their specific circumstances into account – we can’t expect them to meet the benchmarks set by businesses in a different lifecycle.”

By way of an example, Bianca offers a use-case that is more than familiar to many entrepreneurs: In the early days of the Covid-19 pandemic,  Thandi was retrenched from her marketing position at a large corporate. Instead of looking for a new job, she teamed up with her brother (a content and media specialist) to launch a two-person marketing business. The start-up has done well. The company has been trading for over a year, it has several large clients on board and purchase orders in the system. What it does not have is steady cash flow. The company hasn’t been trading long enough to build up healthy cash reserves and its clients pay on 60 and 90 days.

“If we only evaluated  Thandi and her brother on the criteria of how long they’ve been operating, their cash reserves and profitability, we’d be missing the fact that this is a young business with a lot of potential – they just need a cash buffer while they wait for invoices to be settled,” says Bianca.

“A small Revolving Credit Facility of six to eight months is all they need – but under traditional lending criteria it wouldn’t be available to them. How many entrepreneurs have struggled to grow because they didn’t get that small but meaningful assistance? That’s where SME Lending comes in.”

5 ways to get your start-up credit-worthy

According to Bianca, Sasfin is rewriting the rules for SMEs, ensuring that each business is looked at holistically in terms of its overall potential, but there are a few things that business owners can do to help banks evaluate them for credit as well.

1. Before you launch a business, focus on a 9 to 5 job

As Bianca knows, many entrepreneurs have launched businesses out of necessity (particularly since the pandemic), but, if possible, she still advises a 9 to 5 job as an ideal training ground for business ownership.

“I learnt this from watching my aunt but have since seen it in the SMEs we work with. A business owner with a corporate background treats their businesses differently. They don’t treat their personal and business banking accounts as one and the same. They have a professional website because they know it builds trust. They focus on client service, answering emails and following a structured day,” she says.

For start-ups that do not have corporate backgrounds, the advice is simple: Read business management books, connect with a mentor, and formalize your business as quickly as possible.

2. Separate your personal account from your business account

“This is one of the biggest stumbling blocks we see for small business owners. There is fluidity between their personal finances and the business’s account, which presents a few challenges. First, we should never be seeing expenses for things like sports betting, a retail account or non-work-related entertainment expenses on a business’s management accounts, but that’s what we end up receiving. Second, it’s difficult to judge how strong a business’s cash flow is if all personal accounts are being paid from the same account.

“Remember, it’s the credit department’s role to ensure that we are being responsible with the credit we extend. Yes, we understand that smaller businesses do not have equity, which makes the cash flow of a small business even more important. We need to see clear management accounts and responsible spending that supports the growth a business – personal expenditure not only muddies the water, but it doesn’t show that the business has strong financial controls in place.”

3. Be transparent

“Whether it’s because small businesses believe they need to look bigger, and therefore don’t want to reveal details that show they are still small, or because business owners don’t realise that banks need a full, meticulous view of a business’s operations and finances to make an informed credit decision, very often the reason why a credit department is uncomfortable offering a credit line is because they don’t have a good view into the business,” says Bianca.

“For example, I had one client who was operating from their lounger – they even kept stock in their lounge. This made perfect sense. They were a small start-up and investing in premises didn’t make sense yet, however, they had listed a large amount of stock and the credit department couldn’t see where this stock was housed. Being transparent would have solved the problem and made it far easier for the credit department to extend an appropriate credit line to help the business to grow. The key is to have your management accounts in order, your numbers in order and all the necessary paperwork on hand to give a full and precise view of your business.”

4. Work with your loan consultant

“The credit approval process is designed to understand your business so that your ability and willingness to repay a loan can be determined,” explains Bianca. “In my experience, business owners will identify a need for credit, and they’ll even know which lending product they’d like to apply for, but they don’t know where to begin. That’s where I come in. I work with my clients to understand what gives them a strong case for credit, where the red flags might be and what gives them a good case for receiving credit – this is particularly important if it can be reasonably shown that credit will result in growth. Your bank statement should also clearly show who is sending you money and how you are spending it. You’re going to have to answer all these things anyway, so make sure you know them.”

5. Prove you are trading

There are many ways to do this, from ensuring that you have a business website and that you’re listed on Google My Business (which lists your premises, another factor that supports legitimacy), to being registered with local associations and boards. “Where possible, include a great trade reference,” says Bianca. “Something that says, ‘we have credit with this supplier and they can confirm we are a good payer.’ All of these proof points add up.

“At the end of the day, credit is based on both the willingness and ability to repay a loan. The more you can confirm these two points, the higher your chances of securing credit that is appropriate to your business.”