Financing SMEs on potential, not achievements
Assessing the existing management abilities of black-owned SMEs and supplying financial support based on their potential for growth has become critical in an arena where legislation now demands that SMEs collaborating with larger companies should have contracts.
"The impact of this change is profound where financing of existing SMEs is concerned. We now consider the SMEs position in the supply chain-especially when they have contracts with large corporations. By assessing the outlook of companies within their sectors, and how this could affect the sustainability of SMEs, we are able to gain an accurate understanding of opportunities available.
"In the case of SMEs that have contracts with larger companies, we assess their ability to meet contracts, the resources and the people they have available to facilitate growth. To provide the maximum benefit, all these factors have to be perfectly aligned. We then look closely at the enterprise's management before forming a final view on whether to assist financially or not."
Success through planning, delivery and profitability
Often, where SMEs default on delivery to corporates, the reasons are found to lie outside the traditional problems, such as poor cash flow management, that cause the failure of many SMEs. These problems can be rectified if remedial processes are set in place to assist the SME.
"The support offered by Standard Bank's enterprise development consultant ensures that the SME owner understands the full significance of contracts and their terms when the process is first undertaken.
"This is where our 'incubation' process begins. We help SMEs realise that sustainability is only guaranteed by planning, delivery and profitability. Many, reliant on tenders to get work, cut prices to the bone in order to get the work. This obviously immediately places pressure on all aspects of the business as a single, unexpected event can lead to the enterprise's demise."
Further, along the value chain, the business development experts assess the processes involved in the enterprise from inception to delivery. In a manufacturing company, for example, this could involve making sure that material, manufacturing processes and products comply with necessary legislation, safety and quality requirements.
Incubation essential for forward movement
"Incubation helps the company to comply with the laws of the country, the expectations of the market and also to produce a quality product which meets contractual obligations. In a practical way, incubation and business support helps SMEs move forward."
The business development supplier must understand the business and help take it through various levels so that growth objectives are met as the business matures. On the financial side of enterprises, the finance support means helping the entrepreneurs understand financial risk, financial processes and systems. The emphasis is on creating a financial value chain where the needs of the bank supplying finance are understood and followed. The entrepreneurs are taught to assess borrowing requirements and, most importantly, how to leverage finances so that business growth is achieved.
Lending on future value
"Financing ahead of growth means that start-up companies can also be considered for financial assistance. This is realistic as SMEs often win contracts and are then faced with fulfilling them. The value of contracts can be taken into account and lending facilitated based on future cash cycles and the availability of free cash flow to meet company obligations.
"The value of the enterprise development practitioner lies in helping the company to meet its objectives. The business development consultant helps keep the company honest to their cash flow and constantly updates the financier regarding developments within the business. It is financial discipline that provides business certainty."
Ideally, there are three parties involved when the incubation process is considered. The first is the SME, the second the corporation, which is making the SME, part of its supply chain, and the third, the bank. The role of the corporation is two-fold, one to assist the SME, the second to satisfy the legislative requirements of black economic empowerment.
Meeting BEE scorecards
"Non-compliance with the legal BEE requirements leads to fines and official sanctions of various types. However, appointing SMEs as suppliers and assisting them to develop the expertise required to become effective suppliers, means meeting industry BEE 'scorecard' requirements."
"Diversifying your corporate supply chain and providing an SME a contract for three years is a real incentive. The bank on its side supplies finance as required and enterprise development assistance. The SME must carry some of the management costs on its income statement, as there is an onus on the owner to commit to his or her enterprise's growth."
"The benefits are there for all three parties. On a broader basis more people enter the economy and the potential of SMEs to become drivers of the economy are also enhanced," concludes Mokgojwa.