Debt may not be a bad thing for SMEs as many struggle to keep their doors open
Despite gloomy figures released this week by Stats SA, there is still hope for SMEs to stem the tide and this hope comes in the form of something that SMEs try to avoid at all costs, debt.
According to the latest quarterly figures, the SME sector was particularly hard hit and the numbers released in February also showed an increase in the number of liquidations. The latest Stats SA report shows that 216 companies were liquidated in March this year, compared to 178 the month before – a 21% jump.
But other sectors have also felt the brunt of the Covid-19 pandemic.
According to the Tourism 2020 report, foreign arrivals dropped by 71% from just more than 15.8 million in 2019 to fewer than 5 million in 2020. Education inflation recorded its lowest annual rate in three decades. Stats SA surveys educational institutions and crèches once a year in March. Education fees increased by 4.1% in 2021. Last year’s rise was 6.4%.
It is common knowledge that SMEs are doing business under enormously difficult circumstances, and the challenges to keeping the doors open are numerous. Add to this list, the topic of financing and the cost of financing if you are hoping to expand or diversify.
But now, co-founder and CEO of Lulalend (financing partner to South Africa’s SMEs) Trevor Gosling, said there are still advantages to the difficult prospect of taking on debt in a fiscally responsible manner that ultimately serves a positive long-term goal.
“Regardless of the size of your company or how great your product may be, at some point every business will need more finance than they have immediately available. When this happens, accessing additional funding will help to give your company the fuel it needs to grow. It may seem counter-intuitive, but fast access to capital plays an important part of any business growth strategy,” said Gosling.
He added that there is often a misconception that all debt is bad or that it is only used by struggling companies.
“In fact, the opposite is often the reason why some of the world’s largest companies, including the likes of Apple and Coca-Cola, routinely seek capital infusions to keep profits within the company, maximise their tax savings, and assist with short-term financial obligations.”
Gosling said debt can also help to improve the bottom line of a company because it makes expansion possible, and can enable increased marketing efforts or the purchasing of new equipment and products. Loans can also support seasonally driven companies that are often extremely profitable during peak season trading but need the extra cash to buy inventory and supplies during the quieter months.
Gosling said for many of SA’s burgeoning SMEs, what matters most is the overall cost of business funding and the speed at which it can be acquired. While both financing options can help to give access to capital, using debt to support growth rather than equity is generally preferred.
“While you will owe interest on debt, unlike equity, the funding that it provides doesn’t mean you will have to lose a stake in your business. Any profits that are made after paying debt and interest will be yours to keep. It is also now possible to acquire a business loan in as little as 24 hours,” Gosling explained.
Willem Haarhoff, CEO & co-founder of DoughGetters Accounting, who benefited from Gosling’s services, said SMEs are the future of the country’s economy.
“The biggest challenge we face is, number one, access to cash. We connected with Lulalend the first time. It was extremely easy to get approval, it happened within the same day, and the very next day the cash was in the bank,” said Haarhoff.
Mo Mondisa, owner of The Kids Cooking Club, admitted that it was difficult to get access to funding for small businesses.
“We tend to go to the banks first, then you have to fill out like a bible, you know, like 60 pages. I really do want to grow my business. It makes it easy when we have places like Lulalend that want to help us out,” she said.
Gosling concluded that if SMEs are responsible with their debt, by making on-time payments, this can also help to improve a business’ creditworthiness. In turn, these smart credit habits can help to increase your overall spending limit, lower future costs, and help you to obtain better terms for future loans.