Faisal Mkhize, managing executive of ABSA Small Business explains the steps of acquiring funding for different businesses.
Funding is one of the major stumbling blocks for aspiring entrepreneurs and people are often discouraged from starting up businesses because of this aspect. However, obtaining funding is frequently less complex than it appears at first: it all depends on making sure your business is sufficiently sound to attract backers, then choosing the option that’s right for you.
Faisal Mkhize, managing executive of ABSA Small Business, explains that there are three main avenues open to potential business owners seeking funding. True, start-ups requiring funds of up to R10 000 may consult family members, friends or even associations like stokvels for a loan, but those requiring a larger amount may need to approach a bank specialising in small business financing.
Naturally, each of these options has its own advantages and drawbacks. For instance, the trust you share with friends and family means that they’re likely to be fairly flexible when it comes to paying back your loan. Plus, you won’t need to produce the comprehensive documentation usually required by a bank. Family and friends will also be patient and understanding when times get tough but, if the business fails completely and you’re unable to repay the loan at all, you run the risk of damaging the relationship. If you do not have relatives to help you finance your business, another option will be to go to banks that offer products specifically targeting the lower end of the market. ABSA, for instance, offers a product named Micro Enterprise Finance targeting hawkers and informal traders.
Venture capitalists, on the other hand, are more interested in acquiring a stake in an entity that is likely to have exciting long-term prospects. For this reason, they’re more attracted to larger ventures, such as a greenfields project or an innovative new product. They often have an appetite for risk, which is great news for the entrepreneur who is taking a chance on a perceived gap in the market, and because they understand that such concepts take time to develop, they’re willing to wait a while for the loan to be repaid. However, their deeper level of investment also means that they expect greater rewards, and their funding may hinge on acquiring a stake in the company.
Mkhize says that the major advantage of obtaining funding through a bank is the fact that such institutions realise the importance of helping the entrepreneur succeed – indeed, they have a vested interest in seeing the business do well – and are therefore well equipped and eager to offer assistance and advice with challenges common to small business owners. However, because they have to protect their own interests, they require entrepreneurs to meet several criteria before they are willing to grant funds.
The processes followed by ABSA are a case in point: first, the bank runs a credit check on the individual, and researches their background. “We’re looking for signs that the individual understands the environment of their proposed business. For instance, if an entrepreneur is seeking funds to establish a restaurant, we would feel more comfortable backing someone who has already worked in this industry and who has a grasp of the long hours it entails, the cash flow issues involved, and how to handle stock, rather than someone who is looking into a new venture because they’re not sure what else to do with themselves,” Mkhize explains.
The bank will also show preference to people who have formulated a comprehensive business plan, outlining their plans for the business, its background and history, strategies, thoughts around marketing, the competitive environment, staff considerations, identified threats and weaknesses.
According to Mkhize, it is advisable for the entrepreneur to prepare this information themselves, rather than to present a plan prepared by a business broker, as this proves you have invested time and energy in the project. Banks, he observes, are inclined to favour people who have demonstrated a passion for their project, as this denotes a higher chance of success.
Of course, the bank also keeps a careful eye on the viability of the proposed business. “We also consider the available collateral, especially if the venture has an element of risk,” Mkhize says. All hope is not lost if no collateral is available – this simply means that the bank will look for other means to protect itself, for example, by securing a guarantee through Khula, for example. A Khula-backed guarantee, says Mkhize, is ideal for applicants who do not meet the lending criteria of banks, as the Department of Trade and Industry undertakes to guarantee the loan.
In all cases, the bank will interview the applicant to gain a true measure of their character and belief in the business.
Ultimately, Mkhize concludes, entrepreneurs will find it easier to obtain the finance they require if they approach the correct funder – and, of course, if they have conducted the research to prove that their investment and confidence will be well-founded. |
