How to navigate securing finance for your business in 2014
A common issue raised among local entrepreneurs is the ease of access to business finance, which is often criticised due to the difficulties experienced when attempting to secure funding to either establish, or grow, a business.
According to Christo Botes, Executive Director of Business Partners Limited, while access to finance is a challenge for many South African entrepreneurs, often entrepreneurs also pose challenges to financiers, which may sometimes hinder the approval process.
“In general, financiers have adequate funding available to finance business owners. When approached for financing, financiers are often either offered security that is not acceptable, or not offered security at all and hence need to carry all the risk. Financiers are then faced with the difficult task of proving an entrepreneur’s ability to service the debt, together with the business being viable over the long turn.”
He says that this results in financiers having to select the best candidate behind which to place their investments. “Not only do financiers have to choose who to invest in, but it is also the financier’s responsibility towards their other stakeholders to make those decisions based on information they are given.”
Often, when entrepreneurs approach financiers with their proposals, too many are guilty of making the same errors, says Botes.
He says that a key error made by entrepreneurs is not fully understanding the value and real purpose of a business plan. “Some entrepreneurs are not familiar with their business plan’s contents as it may have been prepared by a third party. As a result they only view the business plan as a document required by the bank, rather than as a living document and roadmap to successfully run their business.
“The business plan is not a document that once shown to financiers, should be hidden away only to be considered again when the time comes for further financing. Instead, it must be viewed as the document guiding the business’s growth and expansion, its challenges and milestones and the route to ensuring success.”
He adds that financiers acknowledge the majority of entrepreneurs’ errors come via self-assessment. “Entrepreneurs often miscalculate the changing needs of their business and typically possess ‘doing skills’ which are not backed by crucial business skills. This means that when securing finance, the financier’s assessment of the entrepreneur, and the extent to which that person has knowledge and understanding of their business plan, is vital to achieving a successful application.”
Entrepreneurs sometimes also fail to wholly disclose their financial positions, says Botes. “A judgement against an entrepreneur speaks greater volumes than merely the legality as it highlights their approach to dealing with problems. For example, is the business owner likely to hide away, or rather face issues head-on by taking the steps to resolve a matter? While judgements will weaken an entrepreneur’s chances for securing additional finance, addressing how those judgements came to fruition and what steps were taken about them is equally as powerful.”
Botes says that in order to avoid the mentioned errors when applying for finance, entrepreneurs need to ensure they have sufficient information available that is relevant for their specific application.
“Existing businesses applying for finance should provide at least two years’ of audited financial statements, personal balance sheets for all members of the business, CVs of their main members, their business plan and a summary of their financial needs.”
Botes says that when it comes to requests for start-up finance, the financier’s assessment will focus on the entrepreneur. “Financiers will want to know the entrepreneur’s relevant experience and talent, what their CV and personal balance sheets reflect, as well as whether there is a detailed business plan, coupled with a detailed evaluation, available.”
By ensuring the correct background and necessary paperwork has been submitted, entrepreneurs are able to maximise their application to secure finance. “When these issues are in place and the entrepreneur’s dreams are shown to have feasible and realistic traction, the potential for financiers to provide funding escalates,” concludes Botes.