SME funding: fact or fallacy?
Findings from our inaugural Pastel SME Business Survey tell us that the lack of funding for this sector of the economy is one of the top three barriers to business growth. In fact, one in every five respondents reported that they were either unable to, or unaware of how to, raise funding for their business.
This is astounding! But not for the reasons you may imagine. The last time I checked, there were billions of rands of funding available to local businesses annually.
Whether venture capitalists, NGOs or the better-known funders like the IDC, DTI, Business Partners and the NEF, they all maintain that they have plenty of money available to invest in business owners with good ideas and great leaders.
The very abundance of these organisations and the types of funding they offer is evidence of the growing awareness of the vital role SMEs play in our GDP. Considering all this, I find it inconceivable that there are still endowment shortages. So why the gap?
At a recent SME seminar hosted by one of the well-known BEE business funders, organisations that provide SMEs with financial support revealed that 93% of applicants failed to meet the criteria needed to secure backing. In fact, many funding institutions are voicing their frustration at the lack of excellent opportunities. Their reason: very few entrepreneurs have any sense of job readiness, sound financial planning, business acumen or strategic marketing proposals.
When times were good, it was a lot easier for everybody to raise capital. But post-credit crunch, a lot more focus has been placed on the preparation of a sound and compelling business plan. Investors want to see a keen business understanding with real facts, figures and projections because above all, any kind of lender wants to mitigate risk. Entrepreneurs need to think about the challenges they are going to face and demonstrate how they will overcome these.
Although our SME survey targets existing businesses, the same principles apply for start-ups: preparation and planning are essential. The only exception is that for active businesses a history of strong financial management is important to prove that more capital will be well utilised. Financial reports are the vehicle for illustrating a business`s growth trajectory and medium- to long-term profit potential. I think that creative and engaging entrepreneurs often get absorbed in innovative business ideas and consequently neglect their day-to-day financial management.
It`s also imperative to demonstrate complete business knowledge. It amazes me the number of business owners who aren`t familiar with fundamental financial concepts such as gross profit percentage or profit ratios. Can you imagine securing a hefty amount of capital without knowing these crucial terms? I would like to suggest that investing in knowledge and in solid business and management systems will go a long way to furthering success.
Apart from a comprehensive set of financials, there are other crucial factors taken into account when evaluating a request for funding. Different investors have different risk appetites and focus on certain industries, yet business owners don`t take the time to find the appropriate match. Did you know that 60% of businesses seeking private equity don`t even pass the first 30-minute review because their proposals don`t match the equity firm`s interests?
The social values of an entrepreneur are also notable. Integrity, vision, drive, experience and sound business acumen can go a long way in swaying a funder. Most business owners have intuitive knowledge of all these things, but fail to communicate them with the lender. Investors want to see an executive summary detailing the company`s plans, a full marketing review and information about products, costs, processes and sources. A capital overview including fixed assets is also required, as well as an environmental assessment. Additionally, I would advise any business owner to put forward as much of their own capital as possible, because this shows true commitment to the business`s success and a vested interest in a healthy return on capital.
When all is said and done, business owners need to make sure they have the appropriate systems that deliver the right kind of business analysis so that funders can make a proper assessment of the application for finance. Funding is certainly out there, but it`s up to the entrepreneur to demonstrate that they want and deserve it.