There are different factors that need to be considered by SMEs looking for funding solutions. Picture: iStock
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Small and Medium-sized Enterprises (SMEs) have played a significant role in boosting South Africa’s economy and creating jobs.
However, these SMEs are often faced with a lack of financial resources to start, sustain and grow the business.
Finding the right funding solution to navigate financial obstacles has been an evident challenge for quite many SMEs.
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Louise Naidoo, FNB SME lending, Product Head says there are different factors one needs to take into consideration when determining the right funding solution for a business.
Strategic goal alignment – Naidoo advises business owners to ensure their cash flow predictions align with business goals by outlining detailed short and long-term goals. This will help with assessing the financial need and purpose behind seeking the funding. Whether the reason is for startup capital, expansion or addressing working capital gaps.
Risk tolerance – Business owners need to understand their comfort level with uncertainty. If they do not have a high-level risk tolerance, then Naidoo advises they opt for more stable options with fixed terms. High-risk funding options include venture capitalists or angel investors. These options include having to give up a portion of ownership or equity in the business. “It is riskier as it links the business’s success directly to investor’s expectations.”
Repayment terms – She says one of the most important things for business owners is to choose a funding solution with a repayment plan that aligns with the business’ cash flow. Those who prefer predictable financial commitment must opt for a fixed repayment schedule. This is also suitable for stable revenue streams. “Be aware of early repayment penalties or repayment adjustments linked to your performance.”
Interest rates offered – When looking for funding solutions, one needs to understand the difference between fixed and variable interest rates. “If your business has a steady cash flow and a positive credit history, one may qualify for lower interest rates.”
Creditworthiness – SME owners need to ensure their business accounts are in good standing and maintain a healthy credit score in their personal capacity as well.
Application process – Understand the approval criteria, the process and how soon you can expect the funds to be made available if approved.
Choosing between short-term or long-term funding solution
She says by considering the abovementioned guidelines, owners will be able to choose the funding solutions that align with their short and longer-term financial goals and capacity.
Choosing between a short-term or long-term credit product depends on your business needs, financial goals and what you require the funding for. “One of the most practical ways to make informed decisions about how much external funding your business may require and when you will need it is through cash flow forecasting.”
Naidoo believes cash flow forecasting is a critical tool for SMEs to manage their financial health effectively. It basically involves projecting expected cash inflows and outflows over a specific period, usually a year.
