Three of the major hurdles facing entrepreneurs are getting a new business venture started, making it sustainable, and then being able to grow the business when opportunity comes knocking. A key challenge during each of these phases is the entrepreneur’s ability to access finance, says Standard Bank.
“There are various options that aspiring or existing business owners can pursue when it comes to finance. The options depend on what is most suitable for the business itself, as well as at the different stages of the business’ lifecycle,” says Ravi Govender, Head of Small Enterprises at Standard Bank.
“Small businesses are often born out of the passion that a person has for a particular activity. Many business owners launch enterprises on a shoestring and pour all their energies into making their business succeed – only to fall at the final hurdle when they should be taking their enterprises to the next level. This is often the case because they are not aware of how to raise the additional business capital they require for growth.”
“In addition to others, the two main options to consider are borrowing money from your bank or selling some of the equity in the business to investors in return for a capital injection. Both options have their advantages and disadvantages.”
“Banks are often the first port of call when it comes to obtaining funding. It is worthwhile for someone approaching a bank to remember that if they pay attention to the ‘5 C’s’ of small business lending, the chances of being granted a loan are increased,” says Mr Govender.
Essentially, banks need to be comfortable with:
- The Character of the entrepreneur and the management team.
- A business’s Credit Score, as a good credit history means that the business is run well and its financial obligations are met.
- The Capacity of the business owner to meet monthly loan repayments.
- Whether all, or a portion of, the Capital in a business belongs to the owner. An owner who has invested his or her own money into the business is personally invested in its success.
- Collateral being available to provide security for the loan.
“Borrowing money has a lot of advantages for businesses. Although interest has to be paid on the capital borrowed, it is predictable and the interest paid on a loan is tax deductible.”
“At the other end of the scale is raising money from equity investors. This is usually most attractive when a business is in the start-up phase, as it eliminates the large expense of loan repayments.
“An additional benefit of equity financing is also the expertise and access to resources that the right investors can provide. However, these benefits have to be balanced with the fact that ownership is diluted and control can therefore be lost over a portion of the business,” says Mr Govender.
Other avenues of funding growth depend largely on the particular lifecycle that the business is in. Small companies with little collateral and no track record usually have to rely on additional capital being supplied by the owner, or someone who backs the owner and is not too concerned with receiving immediate returns on their investment (angel investors).
High growth potential and a limited track record can open up finance opportunities with venture capital, business loans and mezzanine financing as well as trade credit.
“As a business matures and grows, so other avenues of raising capital become available. The ultimate goal for any business, and one many entrepreneurs aspire to, is seeing their businesses listed on the stock exchange and members of the public providing capital to fund future growth.”
“Whatever the size of the business, and the ultimate aims of its owner, it is worth remembering that the first avenue of assistance is usually a bank. At Standard Bank, we believe it is our role to partner with our customers in the SME sector. Our customers’ success is ultimately our success,” says Mr Govender.