The world of start-up entrepreneurship is an enormous jungle. Many who start get lost. It is understandable that times are hard across the South African economy and our challenges may affect the general weakening of many businesses.
At the same time business owners would expect a macro-level stimulation of activity through the empowering effects of BEE Supplier Development and
Enterprise Development legislation which has more than made available funding for small businesses.
In addition to funding, this legislation augments market access opportunities through a deepening of the relationship between larger corporates and SMEs, while also encouraging corporates to revise their procurement strategies, even formalising these for those who never had procurement plans.
For many small businesses, there is room for new markets, and at the extremes possible innovations through opportunities or methods of business previously not thought of.
However what is happening today is nothing new. The last few years have shown failures in Black Economic Empowerment and an imbalance in the colour of the beneficiaries of BEE. The funding also always creates consultants overnight, who preach various recipes for advancing entrepreneurship.
Many such are individuals who themselves have no comprehension of small business challenges, running a business or the make-up and psychology of the entrepreneur they will be consulting on.
Although funding and market access are some of the obvious concerns, which may to an extent even have easier solutions, social capital and personal capital are lacking. For every successful business, there are many that have failed, and more with permanent bad credit against funders.
Some of the reasons for these failures, even when funding was made available, include:
No Trade Skills
Many individuals starting businesses do so in fields they have no exposure to or any working skills. Distribution of products is one of the most common, including retail businesses.
The challenges of retail business are greatly undermined and many businesses never plan enough and the numbers never stack up, with some businesses never seeing profitability from start to end.
It is arguable that some of the most successful businesses would have looked crazy to a normal person, whilst some were not initially conceived as businesses but became businesses by default.
This is because they would have been revolutionary, path-defining businesses. Whilst these are exceptions, the majority of businesses started are the run of the mill businesses, and really have no exceptional proposition to the market.
Related: 10 Tips for Finding Seed Funding
Mismatch in Priorities
Most funding programmes in a legislated environment may not be business centric. In addition, with wrong implementation partners, and a general tendency towards confusion between business development and corporate social responsibility, interventions tend to water-down enterprises than intervene for growth and sustainability.
Leaving Business Administration To Others
Even the most educated of entrepreneurs make this mistake, to leave the business and its operations to accountants and administrators who may not have an equity incentive to see the business soar.
Some businesses are started to help, and they tend to bleed from it. The few that are started to make money do make money a priority – attracting it, acquiring it, managing it, and multiplying the money.
The greater misunderstanding of entrepreneurship, and the fact that it is more personal than it is policy, leaves even policymakers dumbfounded about what to do. The following could be some of the solutions:
Teach Entrepreneurship Early
There is no better, simpler, material than “The richest man in Babylon” by George Clason. This is an applied version to life and entrepreneurship and not Economics 101. The book also teaches something higher than entrepreneurship, the concept of man.
When starting a business, it is important to involve as many capable people as possible. Keeping ideas to oneself delays success. Leveraging off others is a realisation of masterminds.
Understand Funders and their Priorities
Should you be able to match a funder, it is not what they can do for you, but what you can do for them. Better a funder with profit motives than a grant with no objective. Most grants derail entrepreneurs from their plans, because of lack of accountability.
Most funders have visions to become specialist and preferred providers for the markets they serve. As Identity Development Fund Managers we are defined by our demographic focus on businesses started and owned by black South Africans.
We have over 70 investments delivered in the last five years and have left lasting goodwill in many entrepreneurs we have interacted with.
Related: How to Write a Funding Proposal
Our drive is to realise industrialists and become significant funding partners to our investees, to a point of listing some of our investments. We invest in businesses that have at-least six months post-revenue performance, and our funding is a blend of debt and equity structures that optimises the business’ cash-flows.
In addition all funding is tied to business support that seeks to address the usual pitfalls for most early stage businesses. We are poised to become the first SME bank in South Africa.
Does Your Business Really Need Funding?
Strategy, risks, and opportunities.
Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.
First, ask yourself some hard questions
Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.
Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.
Define your goals
The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.
Evaluate your financial pain points
Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.
It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.
Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.
Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.
Consider your options
Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.
If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.
If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.
However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:
- How long will it take before your investment starts covering the costs of your loan?
- How will you manage repayments if your forecasted growth doesn’t materialise?
- How can you pivot to reallocate resources if your plan is not working out as initially intended?
The bottom line
Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.
How Investors Choose Who To Invest In
Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.
The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.
The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.
Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.
1. Is she honest?
You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.
Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.
2. Does she work hard?
I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)
In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.
It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.
3. Is she smart?
Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.
Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.
4. Is she ambitious?
Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.
An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.
Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.
Read next: The Investor Sourcing Guide
Are You Struggling To Find Financing For Your SME? Try Alternative Finance
If you don’t qualify for traditional funding or if it isn’t the right fit for your SME why not explore alternative funding? We specialise in alternative financing options by providing in-depth and custom plans for you and your business needs.
- Call: 011 886 0922
- Visit: www.spartan.co.za
Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.
Alternative financiers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral.
An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.
The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.
One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.
Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.
A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.
This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.
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