Through the Covid-19 pandemic and events such as the July 2021 unrest, there was a suite of public and private sector financial support for SMEs. Many SMEs were able to access much needed this relief, but some encountered roadblocks in their attempts as they were either non-compliant, could not interpret or meet mandatory criteria/conditions.
Andiswa Bata, co-Head, SME at FNB says an entrepreneur can easily register a business and get a bank account activated within 24 hours through digital platforms, allowing them to develop a financial footprint and that enable a financial institution (e.g., a bank) to assess the health of a business for funding purposes.
Sound financial literacy and management helps to unlock opportunities for SMEs, minimises risks and enables them to have access to finance and credit, an enabler for SME growth in the country. Furthermore, it is important to understand that all lending activities and requirements have to adhere to rules and regulations governing lending in the country. Accordingly, banks also follow and comply with these laws in all their lending activities.
“A common requirement that puzzled many small businesses during the onset of the hard lockdown was whether they were in good financial standing prior to the pandemic or not,” says Bata, as she unpacks what banks consider when determining a lending decision. Some of these are:
- Good standing – essentially asks questions like: How has the business been managing its financial admin? Has the business been keeping up with its normal payments (i.e. Having enough funds to cover your debit orders or not letting debit orders bounce, paying all your accounts on the agreed date and avoiding arrears). It’s also important to ensure the business maintains its CIPC-compliance and that any records and submissions are up to date. Businesses are encouraged to check their credit bureau information regularly and to maintain a healthy personal and business credit record.
- Liquidity ratio – this determines whether an SME can efficiently use its assets (including cash) to meet its obligations when they fall due.
- Profitability – considers the extent of profit the business is able to generate from its sales or services, considering operating costs, assets spend and tax, amongst other factors. Healthier profit margins indicate the operational efficiency and competitive advantage of the business.
- Debt capacity – for which the first step is assessing the free cash flow (past and forward-looking) available to honour long-term debt. Secondarily, any available security/collateral (e.g., a property) or a personal suretyship that can support the business funding application.
Also important is an understanding of the business’ growth prospects (based on the industry and life stage). Limited growth potential and/or no viable business plan can indicate that any funding would solely be used to fund losses – for which there is typically limited lending appetite.
“This makes it essential for SMEs to understand financial management as well as keep accurate and up to date financial records. Fortunately, there are plenty of resources available to SMEs to guide them through this journey” concludes Bata.
