Entrepreneurs often bemoan the lack of finance available to them from the banks for their start-ups. “The problem in South Africa is not lack of funding,” says Marcel Klaassen, CEO of Biznetwork, a division of FNB Commercial that supports entrepreneurs. “The real issue is that many people start a new venture without really understanding how funding works.”
Klaassen says entrepreneurs need to understand the business of their investors, including their appetite for risk, where their funding comes from, the specific industries in which they operate, the application procedures, and the terms on which funding is granted. The requirements of the National Credit Act also have to be taken into account as the act prevents reckless lending.“When we look at a start-up, it’s not that we do not want to lend money to the business, it’s that the business has a much higher risk of failure than any financier would be comfortable with, simply because there is no track record,” says Simone Cooper, Standard Bank’s head of lending for small business. “We have a responsibility to protect our depositors’ and shareholders’ money, so we will scrutinise an application from a new business owner in great detail.” When banks lend money to a start-up, the chance of getting it back is small. It’s one of the reasons why all banks prefer the entrepreneur to put their own skin in the game. “We have found that many entrepreneurs expect the financier to take all the risk. It doesn’t work that way.
“If you own an asset, such as property, you should be prepared to use that as collateral. That goes a long way towards demonstrating your own belief in your venture,” says Cooper.Klaassen agrees. “The owner’s contribution demonstrates commitment, but it also shows what possible collateral is available to the bank, which thus reduces the bank’s risk.” He stresses the importance of a comprehensive business plan as part of an application for finance. “To understand the business case, we want to see that applicants know all the risk factors, including industry, management and owner skills, products and services offered, target market, suppliers, competitors and other elements that could impact on the business. “The business should be viable and future prospects going forward should look promising.”
There are many ways to secure finance from the bank other than a straightforward loan. “The entrepreneur needs to understand the different financial requirements of the business,” says Klaassen. “These include cash flow, capital expenditure, working capital and other needs. There are a number of options available.”
These options include business credit cards, raising funds against your residential property (such as a home loan), Khula-backed business loans, leverage finance loans, commercial property finance loans, vehicle finance and franchise loans. In the case of asset finance, for items like vehicles or machinery, you can secure finance through the item itself. Naturally, your ability to repay the loan for the car, truck or equipment must be demonstrable. “It’s possible to secure short-term funding such as an overdraft for working capital, or funds from your business credit card. This can give you up to three months’ worth of cash that you need to pay salaries, for example,” says Cooper.
Debtor financing is another option. If you have a book of people who owe you money, the bank will lend you a percentage of that figure, but it’s an option available to established businesses only. Apart from standard commercial lending mechanisms, many banks also offer solutions for start-ups. Nedbank has an entrepreneurial development proposition aimed at the emerging black business market (ventures that are 25,1% and more black-owned). “These entrepreneurs were finding it difficult to get finance so we developed a product that gives them another chance to secure a loan,” says Mark Rose, head, new business development, Nedbank Business Banking. “We structure highly flexible loans specifically for them, so that they do not end up with a massive debt burden. As part of the package, they receive guidance and mentoring.”
A solid track record
A good credit record gives an entrepreneur access to unfettered funding, sometimes without having to provide security for credit, Klaassen explains. “A credit record is an indication of the tenure, responsibility, behavioural patterns and trust established in a relationship. When a business has a history of operating successfully, creditability is established. Also, banks use the business owner’s behavioural data in their credit scoring models. Credit bureau ratings are a major factor in any credit decision, and a poor track record will disqualify a business from receiving funding.”
Trust is a key requirement in any relationship. Banking professionals stress that entrepreneurs must build a solid relationship with their banks, based on open and honest communication. It’s advisable to choose a bank for your business and stick with it. Developing that relationship over time plays a critical role in establishing that all-important track record.