There are a number of funding gaps in South Africa. Ask anyone who has looked for funding, and you’ll understand the difficulties entrepreneurs face. Part of the solution is for funders and business owners to work together to grow businesses, and that requires good relationships.
What funders want
The first step towards building a relationship with funders – and securing finance – is understanding what they want.
It’s not just up to financiers to recognise if a business is worth the investment risk. Entrepreneurs need to play their part too, by understanding how financing works and how to prepare a successful application.
The five ‘Cs’ of credit assessment – character, capacity, capital, collateral and conditions – are an ideal place to evaluate your own personal characteristics and the state of your business. Funders will base their decision on where you are positioned in terms of these critical factors.
If character is determined by a borrower’s track record in paying bills, and previous non-payment is due to factors beyond the borrower’s control, don’t hide them. Be honest and upfront, and talk about what you’re doing to mitigate the problem.
Capacity may be determined by a business’s ability to generate cash flow and repay loans. You need to have your business finances at your fingertips. The traditional model for lending requires businesses to have risk capital of 10% to 20% and some form of collateral. If you don’t have this, you may still be able to get finance based on your business’s individual criteria. Cost out the project you want to finance; make it clear that you have taken into account factors such as tax and loan repayments to calculate your profit margin.
Capital is the money you use to buy what you need to make your product or provide a service. Normally, finance houses expect you to fund at least 20% of your own needs, so it can be hard to get a loan for 100% of the money you need to complete a project. But if you have a good previous credit record, some institutions will reduce or waive the capital requirement.
Collateral is what you pledge as security for repayment of a loan. It’s much easier to get finance if you can offer something as a guarantee, such as your house or your car. If you don’t repay the loan, the lender can sell your collateral and get their money back.
This refers to the status of your business’s assets, liabilities and equity positions at a specific point in time, often described in a financial statement. Even if you can’t provide a financial statement, be sure you know about and can answer questions on these details.
If you are clear on the five Cs, you will have a better chance of being perceived as a responsible borrower.
Asking for finance
The trick to asking for finance is being prepared. You are selling yourself and your business, so you need to be able to answer any question thrown your way. Here’s what you should keep top of mind.
- First impressions count. Make sure you look good, and make sure you have all your business facts at your fingertips.
- Rehearse your presentation to the lender. If someone else prepares the financial information, make sure you understand it.
- Small businesses can’t necessarily change the hard aspects of themselves, but they can change the soft – make sure you provide evidence of excellent management and project a confident outlook. Get all your documentation ready in advance and present it in a clearly indexed file. Include:
– Your Fica (Financial Intelligence Centre Act) credentials – all financial institutions have to comply with Fica regulations, and preparing the documents in advance will help you to look professional.
– Be prepared to provide your financial information – At Royal Fields we will accept bank statements if you don’t have management statements or audited books
– Include a business profile.
- Be prepared with answers to these questions:
– How much money do you need?
– How long do you need it for?
– What are you going to do with the money?
– When and how will you repay the money?
- If you are asking for funding for a particular project, concentrate on that project – don’t talk about everything else your company is doing.
- Remember, the financier is trusting you with his money – be trustworthy.
- Finally, show your emotional capital: demonstrate that your life depends on your business.