No Data? No Deal: What you need in place to secure funding for your SME
Whether you need finance to help you expand your business or to buffer you against the tough times, the fact is, if you are looking for funding there are certain foundations you need to lay. This entails having insightful and relevant data about your business. Data that paints a picture of your transactions (ins and outs) and can be leveraged by would-be financiers to have better insight into your business’ financial activities. No informative data? No deal!
Here Mandla Khupe from SME financier, Retail Capital, unpacks what you need to have in place to secure funding for your small business.
Data is your asset
Firstly; you need to build a data bank – this is a valuable asset for a small business as it opens up new channels of funding. One of the biggest constraints for SMEs accessing funding is the inability to forecast or understand what is going on in their businesses without reliable data. Unlike big business that you can easily categorise into specific and comparable industries, small businesses are too diverse to have a one size fit all approach. Reliable data becomes a tool that alternative financiers can use to get comfort around a small business’ track record. It empowers us to be able to build risk frameworks tailored to understand individual business’ trading patterns, seasonality, comfortable turnover levels, split between card and cash etc.
Card Sales over Cash Sales
There are 5.78-million small and medium-sized businesses in South Africa, and an estimated half of them do not have a bank account. Reasons for this include scepticism towards banks, high transactional fees and a burgeoning informal economy that is thriving in townships and rural villages, and that still considers cash as King.
But without an account, these micro businesses are unable to show potential financiers their trading history making it difficult to secure funding from accredited financial institutions.
Small businesses are now appreciating the benefits of accepting card payments. Some of these benefits include a needed boost in sales and reducing the risks associated with carrying cash. In South Africa we have access to reputable mobile points of sale (mPOS) such as Yoco, iKhokha and SureSwipe that operate in this market, enabling SMEs to both accept card payments – which have been shown to increase sales by as much as 40% - and create a transactional profile.
A digital presence to accepting cash is not limited to mPOS systems. Business owners can also use QR code payments. Alternative lenders would be able to access the same level of detail via these platforms to make funding available to businesses (think Snapscan or Zapper).
Small businesses that operate in the formal sector – estimated to be approximately 750 000 – would naturally have a digital presence however lack more sophisticated data needed to secure larger loans. In this case it is advisable to use accounting software such as that offered by Xero, Sagepay or QuickBooks. These cloud-based systems help small businesses manage sales and expenses and keep track of daily transactions. They are also used to invoice customers, pay bills, generate reports for planning and tax filing. Again, having access to this data as a lender is valuable in understanding businesses to make risk decisions.
Another important point to consider is that of showing a steady flow of sales. Having erratic trading history where you might trade in some days and cease trading over prolonged period in others would result in unreliable data which financiers cannot interpret to make risk decisions.
While generating sales is dependent on many factors, such as the economy, the product’s viability and pricing strategy, it is essential that SMEs who need financial support show a consistent trading pattern. Otherwise it makes it extremely difficult for us to understand your transactional profile, which affects your ability to secure the funds.
Pay back the money
Unlike banks that want a long track record (sometimes 3 to 5 years), including management accounts, financials, collateral, covenants and equity which typically smaller business clients do not have, we have taken a partner approach to funding SMEs. We seek to understand the trading and income patterns and structure repayments so that they pay what they can afford. This means when the business’ trading is strong, the repayment can be quicker and the inverse is also true – when slow, we extend repayment to match the turnover cycle. This is more flexible and easier on the business’ cash flow as the fees charged are agreed upon upfront and no punitive fees charged for delayed repayments.
The devil is in the detail
The data you need to secure R5 000 is also vastly different to that which you need to secure R5 million. We can pre-approve based on transactional data funding up to R250k, but to get the big bucks you need to provide additional details which could be lease agreements, bank statements and financial records. This process is still less onerous than traditional banking processes.
By putting all of these points into play your chances are much higher in securing the finance you need to use as working capital, buy assets or as a back-up plan.
For more SME funding advice visit www.retailcapital.co.za.