While it is often said that funding is the main reason small and medium-sized businesses around the world fail, not all entrepreneurs understand the many proactive reasons successful small and medium enterprises (SMEs) apply for funding, says Retail Capital MD Miguel Da Silva.
Da Silva says that it is important that small business owners understand that business funding is not the same as taking on unsustainable debt. “Funding is often crucial for small businesses to become sustainable and scale, and contrary to a view that may be held by many new entrepreneurs, successful SMEs proactively seek to build funding lines when the going is good, precisely so that they have runway when the going gets tough. It’s important that small business owners are educated on responsible reasons to seek business funding.”
As South Africa continues its vaccine rollout and the pandemic gradually comes under control, and as all stakeholders work together to rebuild the damage from the large-scale looting, businesses will need to position themselves to recover, and in many instances funding will help them in this pursuit.
Da Silva says one of the most common reasons to set up funding lines is to secure working capital. “Working capital is vital for a healthy small business. Anyone who runs a small business will understand the pressure between invoicing and being paid for services rendered. Cash flow is vital for the day-to-day running of the business. With working capital taken care of, the business owner can use money in the business to pursue opportunities such as bulk stock purchases, new opportunities or even to invest in testing new products and services,” says Da Silva.
Essentially, funding used for working capital provides a cushion that allows the entrepreneur to pursue activities that will grow the business, as opposed to focusing on survival until money comes in.
“Not quite the same as working capital, but with a similar effect, is when businesses take funding to invest in an important asset. If a machine, which comes at a significant price, can reduce costs by a certain percentage and increase output by another over time, the funding capital is used to cover the purchase and spread the payment over a longer period,” he says.
The same holds true for any investment – be that a new vehicle or IT equipment. Da Silva says the funding enables the business to unlock the competitiveness, growth and savings of the investment without the high risk of laying out important cash flow upfront, which could risk the day-to-day health of the business.
Another reason SMEs proactively seek funding is to scale and pivot. “Access to funding can allow a business to invest in new products and services, as well as take advantage of the massive shift to e-commerce that we are witnessing. We saw a lot of this among businesses during the lockdowns, where they used funding to invest in online commerce platforms, warehousing and logistics, priming their businesses to take advantage of the upsurge in online retail,” he says.
He adds that, much like working capital, the business can pursue its growth strategy without tapping into the capital it needs to keep the business running on a monthly basis, such as paying salaries and suppliers. When seen this way, it becomes clear why businesses that don’t have access to funding often fail to scale, he says.
The lockdowns have had a very painful impact on many sectors, says Da Silva. He says some SMEs have used funding to consolidate debt or catch up on things such as rental arrears while using their business working capital to fund the actual performance of the business. “There are many businesses that have solid strategies and plans in place that need their working capital to execute on these. In these instances we have certainly seen businesses use their funding lines to bring things such as supplier and rental arrears up to date, while not impacting the performance of the business,” he says.
Da Silva says that while it is true that the best time to secure funding is during good times, this can only be achieved if the business owner has sight of reliable cash flow forecasting. “There are various cash forecasting tools and skill sets available, and I would certainly advise all entrepreneurs to prioritise this, while ensuring that they spend sufficient time on scenario planning.
“There is no doubt that there will be a recovery, and when it happens businesses will want to be well-placed to take advantage of the opportunities,” he said.