SME finance: Is now a good time to finance for your business?
He stresses however that SMEs should assess whether it is in fact a good idea to source additional funds given current trading conditions. “There are many reasons as to why a business needs to apply for finance. Whatever that reason, business owners should ensure that sufficient research is conducted to assess the feasibility of the credit to avoid placing the SME in a poor financial position.”
Lang says that SMEs are increasingly feeling the impact of the economic downturn, and are under financial strain as a result. “The Reserve Bank raised the repo rate by a cumulative 75 basis points in the first half of 2016 and the IMF recently reported revised South Africa’s economic growth to 0.1% this year, down from its January forecast of 0.7%.”
He says that these economic conditions all impact SMEs’ credit affordability and financiers’ lending criteria, and business owners should therefore be conscious of what is happening in the market, and within their businesses, prior to applying for finance.
He explains that entrepreneurs require capital for different lifecycles of their business. “The majority of entrepreneurs rely on financiers to provide the necessary funding needed to open and grow or expand a business. Increasingly, given current market conditions, financiers’ and banks’ lending criteria are becoming stricter. Interest rates are also rising, and as result, monthly instalments have increased affecting credit affordability by SMEs. Given the changing market conditions, business owners need to ensure their business plans and projected targets are still achievable before embarking on a new or expanded business venture,” says Lang.
Rising inflation and increasing living costs are severely impacting consumer spending on goods and services, and as a result capital may be required to maintain business operations. Lang explains that in such an instance, access to overdrafts is required to enhance SMEs’ liquidity and prevent the depletion of working capital. “Some SMEs require a capital injection to boost and maintain the business until they are once again in a financially secure position.”
Another area where overdraft is often required is to create a cushion for late payments. “Late payment remains a constraint for SMEs as this impacts cash flow. While payment delays can be easily absorbed by larger companies with easier access to credit, late payments could have potentially devastating consequences for SMEs. SMEs aren’t the only businesses facing economic headwinds, and as big business also prepare and adjust to weakened trading conditions, payment terms could be impacted or delayed.”
While access to finance remains a challenge for the creation, survival and growth of SMEs, if navigated correctly, the process can become more streamlined. “Regardless of the circumstances for accessing finance – whether it be an application for new funding or an overdraft – it is vital that financials and a comprehensive business plan are in place. Not only will these ascertain viability of the business forecasts, but also the feasibility of the business owners’ ability to make the necessary repayments. The business plan can also serve as a motivator to the business owners as they achieve the milestones they have set out for themseves in their business plan.”
Lang adds that while the South African economy faces uncertain times, entrepreneurs shouldn’t let these factors impact their ability to continue capitalising on the opportunities available. “Research has shown that innovation and training has aided in increasing the growth orientation of a business during global economic recessions. It also showed that the willingness to seek advice is a key indicator of businesses seeking growth in a pre-recession period.”
For free business guidance, SMEs are encouraged to contact the BUSINESS/PARTNERS Entrepreneurs Growth Centre and harness the business expertise, skills and wisdom of senior business and professional people. To contact the centre, call 0861 763 346 or visit: www.businesspartners.co.za/entrepreneurship-growth-centre/