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How To Choose The Right Finance For Your Business Or Property Portfolio Expansion

Gary Palmer, CEO of Paragon Lending Solutions, looks at how companies should go about securing the most appropriate finance to achieve their growth objectives.

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Business-finance

Despite the economic uncertainty, many companies are looking to grow their operations and assets. Whether through organic growth, or by acquisition, business leaders should carefully consider their growth finance options.

There is money for the right deals

Despite the negative economic indicators, and all round pessimism, it remains fairly easy to attract funding from the market. The key is to know what funders are looking for in a deal.

At the moment, funds are looking at particular sectors to invest in and renewable energy is a hot one right now. They are also interested in businesses which can create jobs and assist in the growth of small business. Essentially they are looking for positive stories, which are good for their business, and also good for the economy.

Banks on the other hand, like to fund growth because they enjoy more transactions and fees as a result of the relationship.

Make no mistake, the asset managers, credit funds and private lenders are also interested in ways to fund growth, however they tend to be cash flow lenders.

They don’t require the same level of surety, choosing to focus on sustainable cash flows and covenants rather than tangible security. They are not interested in the transactional business in the same way banks are and are happy to co-fund deals with banks.

Related: Small Business Funding In South Africa

Matching finance to growth

As your business grows and matures, your funding needs change. The need for flexible finance becomes critical, most especially when it comes to funding growth.

If you are looking to grow organically, but want to achieve this quickly, you need access to longer-term finance. Moreover, the prospect of paying back capital on a loan is not attractive and it makes sense to avoid amortising loans. Interest-only and ‘bullet’ loans (where the payment of the entire principle and sometimes the interest is due at the end of the loan term) are solid options to consider.

Acquisitions on the other hand can be more complicated. While there is also money available to fund acquisitions, you should prepare for a lot more work and due diligence and remain mindful of the timing of the deal.

It’s also important to realise that some funders may require equity in the transaction depending on the perceived risk in the deal. In situations such as these, it may be better to rather pay a higher interest rate on your finance, or negotiate that when certain covenant levels have been met, your interest rate decreases. It’s important to remember, though, that giving away equity to a funder is the most expensive form of debt you can get.

Many people still sing the praises of cash deals. Of course if you are able to pay cash on a deal it’s cleaner and simpler, but remember that you are using equity from your reserves and your return on equity will be lower.

I would recommend a balance of using your own money and debt finance. In this, you will need the correct gearing levels to get the best result for your business.

In commercial property in this market, for instance, a good, conservative ratio is one third owners equity, and two thirds from the bank – this will result in the cheapest rate. Gearing up to 90 percent is achievable and your return on equity will be good (since you didn’t put much equity into the deal), but your risk will increase quite significantly in this scenario.

Know what you don’t know

It is important to have the right help when structuring an acquisition. Work with your accountant and tax expert as well as your legal advisor. They have experience in this and can make sure you have covered every angle when assessing and structuring the deal.

Be aware that you will need a professional valuation of the business or property and it’s imperative to ensure you have met all the necessary compliance requirements. Only once this ground has been covered, should you begin to look at the most appropriate way to finance your deal.

Business owners often underestimate how long the process can be. What’s more they are often completely unaware that there are upwards of 60 companies out there that will finance businesses looking to grow. More often than not, they will simply reach out to the big four banks without looking for an organisation which can give them access to the myriad of financing opportunities out there.

Related: How To Find Funding in South Africa

It’s imperative that you fully understand all your options when it comes to financing a deal. Use an independent financing company who can help source the best deals and the best terms. They will give you an idea of the options as well as how to mix your solution to include short-term, long-term and structured debt.

An independent lending company will also be in a position to mix and match your growth finance institutions and products since they have working relationships with the banks (both big and small), the credit funds, the asset managers as well as select private funders – and are not beholden to any of them.

There is no doubt that the current local and global climate is contributing to an uptick in the number of businesses and assets being sold. This results in some excellent opportunities and business owners should be ready to take advantage of them. The trick however, is to make sure you grow your business in a way which exposes you to the least amount of risk. This requires you to understand your options and making sure you have a team of advisors who can guide you through the process.

Gary Palmer is the CEO of Paragon, which he founded in 2009 during the last big financial crisis, and has grown into a provider of finance to established entrepreneurs. A CA for two decades that includes tenures at Ernst Young UK and Investec SA, Gary has a comprehensive understanding of the financial levers for business growth.

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How to Guides

6 Money Management Tips For First-Time Entrepreneurs

That $5 coffee every morning isn’t taking you to the next level any faster than brewing a pot at the office.

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money-management

How many times have you been told that saving money is a good thing? Financial specialists recommend that you save a bit of money every month, but that’s easier said than done. After all, it’s not uncommon for people to live paycheck to pay cheque.

However, if you want to start a company, you’ll need to break away from this cycle and start budgeting and saving. At times, this will be a trying task, but it must be done if you want to invest in your future as an entrepreneur.

If you want to start managing your money more effectively and set yourself up to become an entrepreneur, follow the six tips below. With these techniques in your arsenal, you’ll start so see immediate changes, and you’ll set good behaviours in motion that’ll serve you throughout your career as an entrepreneur.

1. Prioritise organisation

When you are organised, you can track every facet of your finances. Record all of your financial information in one place so you can refer to it and keep track of your progress.

When you chronicle all of your financial information, you may want to try and organise it by category. For example, when you are recording your current costs, you can categorise them as “urgent” and “future.”

Not only will this system help you stay on top of your personal finances, but it’ll prepare you for entrepreneurial success because it’s a directly transferable skill.

Related: Smart Money For Small Businesses

2. Check your credit

According to a recent MoneyTips survey, nearly 30 percent of people don’t know their credit score. If you are among this group, it’s time to request a free credit report. Once you know your number, assuming money’s tight, feel free to use a few do-it-yourself credit repair techniques to quickly improve your score.

Understanding your credit score and improving it to the best of your ability is paramount when it comes to money management. A little-known fact among aspiring entrepreneurs is that the funding a new business receives is often dependent on the founder’s credit score.

3. Save where you can

People often cringe when they think about cutting back. Fortunately, there are several painless ways to save. Look at your daily habits and see if you have any spending trends. For example, if you spend $5 every day on lattes, you might consider cutting back and only having the expensive latte every other day. Slowly, you’ll get used to this new habit, and your bank account will reap the rewards.

Related: Time Is Money: Tips To Help You Use Yours Well

4. Search for additional information

The Penny Hoarder

Have you heard of The Penny Hoarder or Dough Roller? These are just two personal finance blogs that can help you better manage your money, but there’s a whole lot more out there.

Subscribe to websites and follow podcasts that offer advice on money management. Also, keep your eyes peeled for informative outlets that speak directly about entrepreneurial finances and follow them, too.

5. Set long- and short-term goals

Have you ever noticed that people want to reach their goals in as little time as possible? If you pick up almost any given health magazine, it’ll claim that it can help you achieve extreme results in little to no time.

Unfortunately, crash diets are often ineffective, and “get rich quick” money management techniques often lack substance.

It’s hard to accept that your goals will take time to accomplish, which is why you create short- and long-term goals. In either case, aim to make goals that are specific, measurable, attainable, relevant and time-based. Ideally, accomplishing your short-term goals will give you the positive feedback that you need to continue striving for your long-term goals.

Related: If You’re Trying To Raise Money, Doing Any Of These 9 Things May Scare Off Investors

6. Find a mentor

If you manage your personal finances and entrepreneurial finances, one thing is certain – at times, it will feel like you can’t keep up with everything. Financial planning can be difficult, and it’s not uncommon for it to feel overwhelming.

As an individual, you can seek out mentors that can help you with personal finances. As an entrepreneur, you can continue to work with these people or seek out more established financial consultants that provide you with guidance you need to run your business.

Managing your finances is a trying and rewarding experience. It will feel messy at times, but the more you practice, the more you’ll improve your personal finances and set yourself up for entrepreneurial money management success.

This article was originally posted here on Entrepreneur.com.

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How To Raise Working Capital Finance

There are more than 150 working capital funds available for SMEs in South Africa. Here’s what you need to know to access them.

Darlene Menzies

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working capital finance

A healthy cash flow is the life blood of a business. The reality is that most businesses experience cash flow problems from time to time, which could be caused by a structural problem in your supply chain, inadequate debtor controls, poor pricing structures, bad planning, too much capital being tied up in stock or possibly the impact of unplanned growth on your existing resources.

Whatever the reason, the good news is that there are more than 150 different working capital funds available for SMEs in South Africa. Working capital loans are short-term loans that are designed to provide financial bridging to address cash flow needs.

The more you understand about how these funds work, the better you will be able to identify the most appropriate option for your specific needs.

What’s available

Overdrafts and credit cards

Overdrafts and credit card facilities are a good option for relatively small, short-term cash flow problems. Most banks are willing to provide profitable businesses with overdrafts and credit facilities and you will only be charged interest on the money you use. Some banks charge a small monthly fee for these facilities even if you don’t use them, but this is a small price to pay for the convenience of being able to meet financial obligations.

Related: Equity Crowdfunding In SA Explained

Contract finance

Also known as getting upfront cash to fund the work for an approved contract. If the reason for the cash flow problem is high sales volumes that result in a temporary cash flow issue, contract finance can be a good option. Contract financiers want to know that your client is reputable and has a good payment history. They’ll also want assurance that you have the knowledge and experience to fulfil the terms of the contract.

First prize is contract finance that enables you to control both the finance and the contract work although in some cases the lender will insist on controlling the finance and may even want involvement in managing the project. Most contract financiers charge an interest rate linked to prime and you will also be charged for drawing up cession documents if this is relevant.

Debtor finance or invoice financing

Also known as getting cash while waiting for customers to pay invoices. If the cash crunch is caused by customers who will take a long time to pay you, debtor finance can be useful. In this case, unlike contract finance where the finance is provided prior to the work being completed, debtor finance requires that the work has already been done and that the customer has been invoiced. As with contract finance, the credibility and credit history of the client is key to lenders as they rely on their ability to pay your invoice.

On average you can raise between 75% and 80% of the value of the invoice within a day or two of sending the invoice to your customer. There is usually an administrative fee to be paid plus interest on the loan — it can be an expensive way of getting finance but it is better than waiting 90 or 120 days for your customer to pay you if you have cash flow constraints. Debtor financiers offer two options — invoice discounting and factoring. Factoring is when your client pays the lender who then returns the outstanding portion of the invoice to you (less their fees).

Invoice discounting is where the customer pays you and you pay the lender i.e. the client does not know that you have borrowed against their invoice. There are usually big penalty costs for late payments. Be aware that if the client does not pay by the specified date agreed with the lender, you will incur additional penalty costs.

Retail Finance

For businesses that operate in the retail sector and generate their revenue from debit or credit cards or EFTs there are lenders who provide loans that are repaid by deducting a small percentage of daily sales. You will need to generate a regular income of at least R30 000 monthly to qualify for this type of finance. The useful aspect is that repayments vary according to income generated. During busier months, you’ll pay more, and less during quiet periods.

Terms Loans

Term loans are another popular way of raising finance to cover cash flow gaps. The money is loaned for a fixed period and you agree to repay at regular intervals. Interest charges are usually linked to prime and the rate is linked to your risk profile. The duration of term loans varies according to the business’s needs and lender’s terms.

You will be expected to provide collateral to raise a term loan. Lenders will also check your credit rating and financial statements, business plan and possibly the order book before they agree to lend you money.

Related: The Truth About Venture Capital Funding

What working capital funders expect

What working capital funders expect

The key to obtaining working capital funding is understanding the lenders’ risk. To minimise their risks, lenders will require security for the loan. Providing collateral is often difficult for entrepreneurs who do not own property or have assets or investments that can be ceded to the lender for the duration of the loan.

Lenders will ask you for a list of personal assets and liabilities and based on this information, they may ask you to sign personal surety for the loan. If you do not own sufficient assets, you’ll need to find someone who does who is willing to stand surety for your loan. This means that if the business fails to repay the loan, the lender will approach the person who signed surety, to settle the debt.

For terms loans, retail finance, overdrafts and credit cards, the lender will focus on the financial strength of your business and its trading history. They usually only consider companies that have been in operation for at least a year and can show that the business is profitable, has a regular income and achieves good credit scores. For contract finance and debtor finance, lenders focus on the quality of your client and may fund working capital advances to businesses that are not yet profitable.

Working Capital Loans

Working capital loans are short-term loans that are designed to provide financial bridging to address cash flow needs. The more you understand about how these funds work, the better you will be able to identify the most appropriate option for your specific needs.


Resource

Finfind is SA’s leading access to finance solutions for SMEs. This revolutionary online platform links finance seekers with matching lenders, providing easy access to over 200 lenders and over 350 loan options. Finfind is supported by USAID and sponsored by the Department of Small Business Development.

Go to www.finfindeasy.co.za to find the business finance you need. It’s free and easy to use.

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Equity Crowdfunding In SA Explained

Here’s a brief snapshot of what it is and how it could benefit your business.

Daniel Van Zuydam

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As an entrepreneur, finding the right funding for your specific start-up is hugely important.

With momentum around crowdfunding growing on a global scale, there is talk about equity crowdfunding becoming a viable option in South Africa. This is very good news indeed, as it has the potential to significantly boost economic growth.

Here’s a brief snapshot of what it is and how it could benefit your business.

Equity crowdfunding is a simple concept: Members of the public (the crowd) are offered equity (shares) in a company (generally a start-up) in exchange for funding. The company then uses that funding to kick start the business.

Related: Quick Shift Deva Kate Emmerson On Crowdfunding

Donations-based crowdfunding and rewards-based crowdfunding have started to gain some traction, with local players such as Thundafund (rewards based) and Backabuddy (donations based) leading the charge; however South Africa is still lagging behind much of the rest of the world, mostly due to the lack of precise legislation around crowdfunding.

The Financial Services Board are yet to decide how they will regulate crowdfunding in South Africa, and so interested parties have been hesitant to engage with crowdfunding, with no-one attempting equity crowdfunding to date.

Another major hurdle is that private companies are not allowed to offer their shares to the public, and the difficulty of registering as a public company is simply too great for a start-up to even bother with. The reason for such stringent requirements though, is to essentially stop fraudulent schemes. The last thing you would want to do is fund an extra round of piña coladas in Mauritius for the opportunistic con-man – the government is therefore right in trying to regulate this area.

Related: Kickstart Your Business Through Crowdfunding

Uprise.Africa

There is, however, light at the end of the crowdfunding tunnel – a new start-up Uprise.Africa aims to launch towards the end of this year. Uprise.Africa will be the first of its kind in South Africa in that it will offer the man on the street the ability to invest in a startup of his choosing and receive equity (shares) in exchange for that investment. This is great news for start-ups, as the public will have a vested interest in the success of the business.

Take the example of a microbrewery wanting to launch their brand and get off the ground: Instead of the public (crowd member) receiving a reward in the form of a case of beers for their contribution, they will receive shares.

They will (probably) order a case of beers from the microbrewery and tell their friends to order beer from the microbrewery, as they will get a financial benefit if the microbrewery succeeds. The microbrewery, as a result, receives funding three times over instead of once – which is a powerful tool for growth.

Essentially, the crowd will be a business partner with the start-up, and in so doing, the first customers of the start-up are already waiting in the wings.

Related: 6 Resources For Start-Ups Looking For Alternative Funding

The World Bank recently predicted that the market potential in Africa for crowdfunding will be up to $2.5 billion by 2025. Equity crowdfunding in South Africa will hopefully tap into that and unleash significant potential in the startups that are based here.

The hope is that the regulators, when they do eventually regulate crowdfunding, do it in such a way that it is not a death knell for the system that has the potential to significantly boost our economic growth.

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