Small Business Enterprises need a funding shift for better economic opportunities

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SME’s need a funding shift for better economic opportunities
Richard Mackenzie, National Sales Director at Transaction Capital Business Solutions

In today’s competitive market, businesses – both big and small – find themselves asking; ‘How do I improve my business, how do I take the pressure off my already strained resources and maximise expertise to get the best returns and ensure business longevity?’ Many SME’s in South Africa rely on cash flow to keep the day-to-day operations of the company running.

In fact, cash flow is the lifeblood of a business however; the majority of companies starting out have capital tied up in past projects and are unable to carry out current jobs as they are waiting for payment on their invoices. This means, very little cash to fall back on when times get tough or when debtors don’t pay, so it’s easy to see why the main reason for failure when it comes to small businesses is overwhelmingly cash-flow related. Just look at the stats:

• 90%1 of companies across Europe, the Middle East and Africa don’t have a transparent view into their cash flow
• 95%2 of companies have experienced a late invoice payment from buyers – a statistic calculated to equate to nearly 50% of the financial value within these businesses’ receivables.

As such, it is now more than ever that SME’s need to get smart about their cash flow as this means that they can not only survive leaner months, but very importantly, that their business is able to look at opportunities and growth areas without being hampered by uncertain flow of working capital.

Small businesses in the process of growing the company are often tempted to take out loans in order to secure more business, continue their operations and look for better economic opportunities – to some this might be ideal, when in fact it can be a detrimental decision for the business as they will be working at a loss for a longer period than what was initially planned. It is for this reason that we are seeing a distinctive shift in SME’s and how they are approaching their funding models, and utilising it to capitalise on opportunities.

One such funding model is debtor finance through invoice discounting or factoring. This financing is one of the simplest ways to fund business growth – by converting existing sales invoices into instant cash rather than waiting 60 or 90 days to get paid. By giving their business the boost it needs to sustain itself as well as grow, means no more sleepless nights worrying about cash flow or about paying salaries and creditors.

In fact, globally, invoice discounting is one of the fastest growing funding instruments to boost cash flow in the SME business environment. And, for small business’s it opens up a world of possibilities, like allowing access to unlimited cash flow, the ability to fund future orders and grow new business sales, but it also allows one to increase stock holding.

Additionally, where companies may require additional cash flow or working capital but don’t have sufficient value in their existing invoices – they can look at structuring a Trade Finance facility against residential or commercial property where equity exists. Trade Finance and Asset-Backed lending is a popular choice for many SME businesses in South Africa as not only is it an easier way to qualify for finance, but it has other advantages including improved liquidity, higher levels of flexibility, lower costs and interest rates and can be used as a stepping stone to building credit relationships. What’s more it can be structured in different ways – either as a term loan, where equal instalments are paid back over a fixed period of time, or as a revolving loan facility where we provide an overdraft facility. Both are structured to suit an individual business’ needs.

Today, there are more options than the traditional banks – there are alternate lines of credit and funding available to businesses who need a helping hand – businesses who want to expand but can’t seem to find the disposable cash; and businesses who have a great offering with constrained cash flow. It is about seeking them out and identifying which solution best works for you.

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