Making sense of the funding landscape for small businesses

It can be hard for SMEs to make sense of the funding landscape available to them. Securing funding and loans can be a challenging, frustrating experience for small business owners, especially for SMEs that may not have experience with the rigorous applications processes.

New research from funding specialists Finfind suggests that, over the past few years, more than a third of SMEs’ business credit applications were rejected, with another third receiving no response, meaning that fewer than one in three applications were successful. Weak or unclear credit histories are the main reasons banks and lenders give for the rejections.

“With demands like a solid business plan, extensive credit history checks and scrutiny of your business bank statements, trying to access small business funding can feel like you are on trial for a crime,” says Tom Stuart, chief marketing officer at Lula, a business funding provider.

“Access to funding is a crucial element to fuel a business’ growth. Small business funding affects all aspects of a business’ operations: equipment and supply purchasing; recruitment and staffing, as well as day-to-day cash flow management. Despite these challenges, obtaining funding is feasible for new and established businesses,” Stuart says.

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Getting funding from entities that are not banks

Business owners must also remember it is not only banks that offer small business funding. There are also government programmes, alternative B2B lenders that specialise in funding and banking for small business owners in South Africa, as well as other financial services.

“A clean credit history and a track record of generating consistent revenue, which is greater than your expenditure, will stand you in good stead when looking to secure business funding,” he says.

In addition, small businesses that embrace digital technology will discover tools to simplify financial monitoring and reporting, which can offer shortcuts along the arduous path of obtaining small business funding and help stack the odds in your favour.

“However, it is not only about you. Lenders will also analyse the state of the industry you are in and try to gauge your relative market position. They will also consider the reasons you give for taking a loan and therefore you must have a clear idea about what the funding will be used for, whether it is for equipment, supplies, salaries, R&D, a new product launch, or anything else.”

Small business bank loans are still big in south Africa, but Stuart says securing a business loan from a bank often requires extensive paperwork and the ability to provide collateral. However, collateral often rules out this option for many SMEs and sadly, they rarely provide products and services specific to the needs of South African small businesses, Stuart warns.

Startups that may not yet be in a position to demonstrate transactions or even have a credit history, will find the small business funding application process challenging and therefore finding ways to demonstrate a business’s future viability can come in handy with some lenders.

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Startup finance providers favour SMEs

Stuart says startup finance providers, whether they are VCs, banks, microlenders, or business credit partners, tend to favour entrepreneurs and any business partners with a good personal credit bureau rating and a history of success in their chosen industries.

“Revolving capital facilities are also a great option for smaller businesses to consider, as they allow you to withdraw and repay as needed, avoiding any unnecessary interest costs that result from borrowing more money than you actually need at a given time.” 

Revolving capital offers businesses instant working capital and lets you manage short-term cash flow gaps and seize business opportunities as you spot them. It will also be ideal for businesses with highly seasonal or variable cash flow needs, he says.

“In today’s dynamic, challenging business environment, small business owners need fast and easy access to business capital. It has become more crucial than ever to empower small businesses with flexibility and efficiency.

“Banks still play a critical role, but it is the smaller, alternative business lenders that lead the charge for user-friendly small business funding and streamlined application processes.”