This is according to Shawn Theunissen, head of corporate social responsibility at Growthpoint Properties and Property Point, Growthpoint's enterprise development programme.
"For many SMMEs, the immediate solution to this is to try and secure finance from a bank or other traditional institution. What most don't realise however, is that funding might be declined due to a mismatch between their and the potential financier's objectives," says Theunissen.
"When it comes to applying for finance, Property Point's experience has shown that many SMMEs often haven't developed appropriate business models that can support and make use of the very funding they are trying to access. Instead of having an existing operational model which allows the business to do business, many rather try to access money to put the model in place. In cases where the business is capital-intensive, this is understandable and something that a financier will take into consideration. In cases where it isn't, the entrepreneur has effectively failed to prove the 'business case' for financing - if the business isn't operational, it cannot make money. If it cannot make money, it cannot repay the financier's loan," Theunissen continues.
To this end, entrepreneurs walking into financial institutions need to appreciate the difference between paying for the business' operations (all the set-up costs) and paying for the business to operate (doing business and generating cash flow). If they cannot prove how the loan will enable the latter, they need to rethink their proposal before meeting with a financier. Having the right operational model in place also goes beyond just doing business. An entrepreneur must have the resources and skills available to make the best possible use of the loan.
"Again, based on our experience, we have seen cases where loans become burdens as opposed to enablers in certain small businesses. This is usually due to a lack of financial experience and accountability, with entrepreneurs either being too scared to use the money, or using it very sparingly or inappropriately. Without knowing how to use financial products, access to these can thus become a moot point in many instances, with poor cash flow being confused with a lack of funding and funding opportunities," Theunissen says.
"While many might argue that securing finance remains very much a chicken and egg dilemma, entrepreneurs wanting to access loans need to rather make their own businesses the starting point for their applications. By working to understand the expectations of financiers, they will be able to deliver on these in their initial applications - proving that their business is operational and that they have the requisite skills to manage their finances. In this way, they will stand a far better chance of not only accessing the finance they require, but of using it to make a sustainable success of their business," he concludes.
