Banks assess your business before granting a loan
According to Kathy Bell, head: transport solutions at Standard Bank, cash flow based contracts are common in the transport industry in terms of sourcing funding for the assets and the overall business. However, the success of the business is totally reliant on a number of critical components.
For example, the contract needs to be concluded with an approved contract provider in a direct line of sight. In other words, if it is a coal transport opportunity then the transport operator needs to have concluded the contract directly with Eskom, not via a sub-contracting arrangement.
Qualifying criteria may include experience in the industry at an operations level, alternatively it may be structured in an owner-driver type model with a management support company providing some skills and services to transition a start-up into a viable transport service provider.
Revenue margins are tight in transport contracts and the operator needs to be able to adjust rates in terms of fuel, wages, toll fees, maintenance and interest rates as and when escalations are necessary.
Bell says that it is not recommended to source funding for start-ups on a sub-contract unless the contract provider is a significant player in the industry that meets the requirements of offering a solid and sustainable source of business.
The contract also needs to speak to volumes and tonne per kilometre rates that must specify the fixed and variable cost inputs of the transport rate, which needs to be adjusted on a formula or index basis. The transport operator also needs to have a detailed plan in place in terms of managing the routes, the loads and the drivers to optimise payload.
The plan must include what measures and controls will be in place to ensure that the vehicle/trailer combination unit complies and adheres to applicable legislation such as the Road Traffic Act and the regulations and the LRA in terms of driving hours and PRDP requirements.
Insurance on the load in terms of Goods in Transit (GIT) and the assets must be included in the rate and the terms need to be shared with the funder in terms of excesses that may put strain on working capital requirements. The type of combination unit needs to conform to the type of commodity or freight that needs to be transported, such as tandem, tandem side tipper link for commodities or a tridem taut-liner if freight is being transported.
A preventative maintenance schedule should ensure that the assets will be able to meet the transport schedule in terms of availability as required by the contract provider. Fuel arrangements need to confirm that the operator can run the business for at least 60 days before revenue starts flowing.
Fuel cards and toll cards should be included in working capital, either funding or preferably as start-up costs in cash. Such requirements should at least be confirmed prior to applying for the funding for the assets as the funder will need to assess this as part of the risk/viability of funding the transport operator.
Diane Worrall, internal brand and business communications, marketing division at FNB adds that banks will assess the company/ individuals ability to repay the loan, and that this assessment would include assessing the most recent financial information as well as the future impact the new contract would have on the company, gearing and cash flow.
The bank would also assess the business case, how long has the business been established, what current contracts are in place, who are the people behind the business and what is their track record. Lastly, banks would look at the security on the deal remembering that under a repossession the security of the truck would only secure the loan at around 50%, depending on the usage and maintenance programme.
Why Spartan Is Focusing On SME Funding And How They Can Support Your Business
Spartan doesn’t just fund entrepreneurial businesses, it is an entrepreneurial business. Kumaran Padayachee, CEO, Spartan reveals this is why his team understands SME financing needs and the unique challenges founder-led businesses face.
Historically speaking, entrepreneurs don’t typically have the quantity and quality of collateral needed to secure debt finance. It was this realisation that led Spartan to develop and deliver a solution that would help SMEs to grow their businesses, even though they didn’t always meet the criteria of more traditional lending institutions.
“We understand that many business owners don’t want to go the equity funding route, selling shares in their businesses in exchange for funding. Without the collateral needed to secure debt funding however, this is often the only route available to them,” says Spartan CEO, Kumaran Padayachee.
“We decided to approach things from a different angle. To service this sector, you need to be flexible. The same rules don’t apply as they do for corporates. To achieve this, we’ve assembled a team that really understands SMEs, their inner workings, the finance they need and the terms that will give them the best ROI for the funding they receive — after all, the point of funding is to help your business grow, so ultimately that’s what it needs to achieve.”
Spartan’s offers financing
At its core, Spartan finances small businesses (fast-growing companies with R5 million to R10 million annual turnovers) and medium businesses (R10 million to hundreds of million in annual turnover).
Spartan finances specialised asset finance (tech, software, plant and machinery, office fit out and furniture); working capital finance (bridging finance, medium term loans); and growth finance (expansion, BEE deals, acquisitions).
Working capital in particular is a big portion of what Spartan assists its clients in. “This is project and growth-related finance, and many of the enquiries are for working capital, for which there is a huge need in the SME landscape.”
Related: Financing That Backs Entrepreneurs
What finance suits your business?
As a debt funder, Spartan’s team carefully evaluates what the finance will be used for, and if the return is greater than the repayments — in other words, does finance make financial sense for the business?
“There are numerous ways that finance can be applied incorrectly by SMEs,” says Kumaran. “One of the first flags we look for is debtors age. If the industry norm is payment in 30 days, but a business is typically paid by its clients in 60 or 120 days, then we know there is something wrong with their internal processes.
Either the company is too shy to be assertive with clients, or it lacks the capacity or capability to invoice clients and collect cash. Either way, the result is a shortage of cash. Business owners in this situation apply for cash in order to be able to pay the bills, when they should be reviewing their business, pulling one or two levers, and improving their cash flows.”
Growing your business with alternative funding methods
On the other hand, there are many situations where working capital and bridging finance can help a business to grow beyond its own, organic abilities.
“A customer project or contract that requires a new product line or opening a new branch are both positive, expansionary situations. The problem is that there’s a lead time gap. You need to start the project, spend cash to hire people or purchase equipment, build internal capacity, deliver on the project and then the customer only pays you. Working capital and bridging finance allow the entrepreneur to do just that, and the company grows as a result.”
Bridging finance in particular is high risk and requires a large amount of flexibility, which is why more traditional funding institutions shy away from it. Spartan on the other hand offers revolving bridging loans to customers the team has worked with. “We understand this space, and our aim is to support the entrepreneurs within it,” Kumaran concludes.
Alternative finance solutions
Spartan is an Alternative Finance company that specialises in financing Small and Mid-sized businesses by providing: Growth Finance (structured finance for expansion); Specialised Asset Finance (equipment/machinery/technology/software/office fit-outs/energy/etc.) and Working Capital Finance (bridging finance & medium term loans).
Bridging Finance is available for one to three month terms and is ideal for contract or project-based businesses. It is a solution that assists businesses with solving cash flow issues due to growth-related challenges in their business and is either for a once-off need or for revolving business use.
Spartan is an Authorised Financial Services Provider 47631 and Registered Credit Provider NCRCP8669. e finance solutions.
What do I need to do in order to get a successful crowd funding campaign?
Advice on getting the gold you need for your crowd funding campaign.
I recently read through crowd funding and though this might be of benefit to me. What do I need to do in order to get a successful crowd funding campaign?
70 percent of most crowd funding campaigns never reach their funding laid out plan. If you only reach a portion of your desired pledge amount all donated funds are then returned to investors once your campaign date is up. Do your homework and make your campaign count.
To get the best out of your campaign, I would strongly advise you do the following:
- Lay out your plan way in advance
- Keep a proper and well-articulated business plan
- Create a compelling story.
- Use the social media and start a social media campaign
- Frequently promote your fundraiser, connect and interact
- Dish out rewards and incentives
- To go viral, go for educative, informative and entertaining videos
- Be more than unique and creative as more exposure will translate to more potential pledges
- Choose the right crowd funding site for you.
- Know and understand your end target audience
Where can I turn when banks are not helping?
Getting bank finance for my restaurant is almost impossible.
Getting bank finance for my restaurant is almost impossible. How else can I access the funding that I need?
Most small businesses will experience a cash flow challenge at some point during the next 12 months and raising capital from traditional banks is becoming a real challenge. Conservative lending policies and onerous application processes mean that finance applications can take up to twelve weeks or longer.
Banks require significant securities, which many business owners are unable to meet. In short, banks are making it very tough for small businesses.
The business cash advance
For businesses that accept credit or debit cards as a form of payment for their goods and services (termed merchants), the business cash advance is now available as alternative source of funding.
In simple terms, a business cash advance offers the merchant an upfront advance to buy a discounted amount of future business turnover. For example, you may be advanced R80,000 for R100,000 of future turnover, so the fees can be easily calculated as R20,000.
The payback is an agreed percentage of your turnover, paid daily until the full amount is paid across. Payback increases and drops with your business turnover and the smaller daily payments are often easier than monthly fixed instalments.
Quicker turn-around and more accessible
Comparing it to a bank loan, the business cash advance is more accessible, operates over a shorter term and requires no personal security. It is also much faster, typically available within two weeks.
The advance amount is based on historical credit and debit card sales and pay overs are daily. The costs are fully transparent and there are no penalties for late payments or extended payback. However, accessibility, flexibility and convenience come at higher cost than traditional bank lending products.
As with any financial product, it is important that the benefits gained from using the money are more than the costs, so it is important to have a good purpose for the funding and carefully consider the available options.
Over the last three years, the business cash advance has becoming more main-stream and this funding is used by business with a relatively high card turnover, such as restaurants, retailers, beauty salons, supermarkets, convenience stores etc.
What to use the advance for
The advance is typically used for a business opportunity, such as expansion, new stock, new equipment, marketing etc. Alternatively, it also offers through a difficult trading period or to cover an unexpected expense such as equipment failure when the money is needed quickly.
Small businesses are a vital part of the South African economy, contributing over 65% of South Africa’s employment and over 50% of GDP – accessing funding is imperative for these businesses to survive and grow.
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