Finding the right funding option for your small business

Cash flow is the lifeblood of any small business and when cash reserves are low, businesses often need access to external funding to help fuel growth, invest in new ventures or keep the business afloat. But, finding the right funding option for your small business can be a huge hurdle.

“Our recent State of Small Business report shows that South African small businesses are ambitious, with 95% expecting to survive the next five years. But to really drive growth, 28% of these small businesses said they want more funding options,” says Colin Timmis, country manager for South Africa at Xero.

“It can be hard for businesses to know where to start, especially as previous Xero research found that just under half (47%) of South African small businesses said they had been rejected for a loan and 70% said they are unfamiliar with alternative lending options available to them.”

If you want to get funding for your business, you must choose which source of funding will suit your needs. You can reduce late payments, find suitable grants, find funding that fits your business needs and work with an advisor or accountant.

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Reducing late payments to boost cash flow

One of the biggest issues impacting cash flow for small businesses is late payments from suppliers, Timmis says. Data shows a poor culture around late payments forces small businesses to engage in more expensive borrowing.

Xero’s recent global study, combining data from Xero’s Small Business Index and the Bank of International Settlements, showed that for every extra day late a small business is paid by a customer, they borrow 1.1% more every quarter.

“The global data also shows that small businesses borrowed most from non-banking institutions to plug the cash flow gap caused by late payments, rather than traditional high street banks or personal assets.”

Timmis says given that these institutions tend to charge even higher interest rates, the evidence suggests that the simple issue of payments is causing more unnecessary borrowing and millions in additional interest payments.”

Finding suitable grants

Borrowing can be expensive and therefore some small businesses proactively seek out grant funding awarded by government or a corporate entity. Grants can open the door to new growth opportunities and there are plenty to apply for, Timmis says.

“These usually have a specific focus that determines where the money must be spent, such as job creation, community enablement, innovation or sustainability, all projects that traditional lenders do not typically support.

“In a low-growth economy, grants can provide extremely useful funding and boost resilience. However, they usually supplement other sources. Just remember: there is a lot of competition and therefore it is important to spend time applying for those that are specifically relevant to your business.”

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Funding that fits your business needs

There are lots of funding options out there and it is important to find what is right for you, Timmis says. For example, a very new business may struggle to secure finance from risk-averse, traditional lenders because they cannot make an assessment based on past performance or see that they have assets to offer up as security.

“Small businesses increasingly turn to alternative lenders because the turnaround time is faster with a fully automated online application process. This is made possible by close integration with accounting software. This means a small business can share its financial position straight from its accounting software and get a funding decision much faster.”

Working with an accountant or advisor

Timmis says Zero’s research shows almost half (49%) of South African small businesses go to their accountants for business advice, well above any other source of advice. The role of an accountant is key when it comes to funding too.

“Borrowing money comes with risks, whether it is interest or giving up a share of profits to an investor. Before making any decision, talk to your accountant about what the best option is for your business. They will be able to help you forecast cash flow and be clear about whether this injection of capital is worth the strings attached and if it is likely to provide a strong return.”