The challenge is that the right credit can accelerate a business’s growth, but the wrong credit solution can become an enormous burden down the line. We share three critical aspects to consider before you apply for credit.
I am continually inspired by South African entrepreneurs. Every day, they wake up, face multiple challenges, and work hard to grow our economy, employ more people, and solve the challenges that their customers are facing.
They are passionate and filled with purpose – both essential ingredients in success, and one of the reasons why I love working in the SME lending space. To support that passion, our role is to offer operational assistance around the financial aspects of a business through a platform that gives business owners the tools they need to monitor cash flow, generate, send, and track invoices and do payroll. We also deliver credit that is appropriate to the lifecycle and individual needs of each business.
1. Have I identified why I need funding?
Many SME owners think that funding is the only way to grow their business, or is the answer to all of their problems, and sometimes it is. On other occasions, it can do more harm than good. It’s therefore important to dig deeper and evaluate all of the risks associated with funding.
For example, if a client wants us to finance additional stock because they’ve been offered discounted raw materials, the first question you should ask is, ‘What are the risks?’ Additional raw materials may require additional capital for storage or to process, which may eat into margins. The lending required to purchase the stock, may further eat into margins. Can the current manufacturing facility increase its output? Is there a market for the surplus stock? A great deal on raw materials isn’t necessarily an opportunity until all of these points have been considered and there is a clear view into the cost of sale, which includes the cost of credit.
Overall, the best way to identify where your need for funding lies is to take a medium and long-term view of growth in your business by asking how you can finance sales. Sales is the crux of everything a business does. It is therefore important to focus on what will help you to produce and sell more products – that’s where growth lies. Paying salaries should therefore come from cash flow, not finance (with the notable exception of the COVID-19 lockdowns).
2. What is the best type of funding for my business?
The answer to this question lies in what you need the funding for and the lifecycle of your business. For example, businesses that have been operating for 12 to 18 months should focus on short-term finance, such as 12-month loan, purchase order finance or invoice discounting rather than a three- to five-year loan. Financial institutions are far more likely to approve a short-term loan in which the bank’s risk is mitigated over three to six months.
There’s still a perception in the market that purchase order finance and invoice discounting are expensive products, but this comes back to your margins. If your margins are feasible then invoice discounting makes a lot of sense in the short term, because the actual cost of an invoice can be relatively small versus the reward of being able to purchase from a supplier to fulfil orders. Short-term products make trade possible, because everything is moving – cash, raw materials, sales and so on, which is the cycle that keeps economies evolving.
A short-term revolving credit line could also be beneficial as there’s a limited administrative burden because the funds are easily accessible, and no purchase order or invoice is required each time the business needs access to cash.
3. How do I ensure my business is credit worthy?
The first step is to protect your bank statement. Make sure you are monitoring any cash moving in and out of your account and keep a close eye on any potential debit orders that may be missed or bounced. If you see a problem, don’t ignore it. Rather speak to a supplier and ask them to extend a debit order rather than hoping for the best and a payment bounces because not enough cash came in on time to meet your obligations. Debit orders and bank statements impact credit bureau scores, so protect them at all costs.
Next, make sure you regularly check your credit bureau score. You can pull your own score from both Experian and TransUnion. This gives you a clear view into whether there are any black marks attached to yourself or your business, or any judgements. Remember, the business is reviewed, but so are all of the directors in a company, so your personal finances and any other legal entities that directors have been involved in are equally important.
Finally, how you manage your debtors’ book is important. We often see business owners who are so busy making the next sales and securing a purchase order that they aren’t focusing on the accounting side of the business and collecting money on invoices. Both are important – sales in the pipeline and actual cash in the bank.
There are many online tools and accounting packages that can help – we have even built an invoice and payroll module that is in our B\\YOND platform to support young businesses that are not necessarily ready for more complex accounting packages. For example, through our platform you can generate a quote, accept a quote, generate invoices, and then keep track of cash flow, including your bank balance versus outstanding invoices sitting in the system. These are great tools to manage cash and dashboards into future, and they keep you on top of your finances.
Cash flow forecasts are also important, and you need a view of all of these elements to be able to make them.
At Sasfin, we have spent a lot of time looking not only at profitable businesses but challenging ourselves to understand how we can support younger businesses that have not yet reached profitability but have the potential to do so. What we look at is cashflow, historic cashflow, cash flow projections and analytics – if we can see a business is able to service the loan, whether it’s a revolving credit line or Payabill asset finance, we can see that the business is finance ready.