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Accessing capital is often necessary, be it capital to start a new business, to fund growth of an existing business or to support a viable business during trying economic times.  

Yet, according to Jeremy Lang, regional general manager at South African risk finance firm Business Partners, small businesses need to assess whether it is in fact a good idea to source additional funds given current trading conditions.

“There are many reasons as to why a business needs to apply for finance. Whatever that reason, business owners should ensure that sufficient research is conducted to assess the feasibility of the credit to avoid placing the SME in a poor financial position,” said Lang.

He said SMEs – especially in South Africa – are increasingly feeling the impact of the economic downturn, and are under financial strain as a result. These economic conditions impact SMEs’ credit affordability and financiers’ lending criteria, and business owners should therefore be conscious of what is happening in the market and within their businesses prior to applying for finance.

“The majority of entrepreneurs rely on financiers to provide the necessary funding needed to open and grow or expand a business,” Lang said.

“Increasingly, given current market conditions, financiers’ and banks’ lending criteria are becoming stricter. Interest rates are also rising, and as result, monthly installments have increased affecting credit affordability by SMEs. Given the changing market conditions, business owners need to ensure their business plans and projected targets are still achievable before embarking on a new or expanded business venture.”

Rising inflation and increasing living costs are impacting consumer spending on goods and services, and as a result capital may be required to maintain business operations. In such an instance, access to overdrafts is required to enhance SMEs’ liquidity and prevent the depletion of working capital, Lang said.

“Some SMEs require a capital injection to boost and maintain the business until they are once again in a financially secure position,” he said.

Another area where overdraft is often required is to create a cushion for late payments.

“Late payment remains a constraint for SMEs as this impacts cash flow. While payment delays can be easily absorbed by larger companies with easier access to credit, late payments could have potentially devastating consequences for SMEs,” Lang said.

“SMEs aren’t the only businesses facing economic headwinds, and as big business also prepare and adjust to weakened trading conditions, payment terms could be impacted or delayed.”

While access to finance remains a challenge for the creation, survival and growth of SMEs, if navigated correctly, the process can become more streamlined.

“Regardless of the circumstances for accessing finance – whether it be an application for new funding or an overdraft – it is vital that financials and a comprehensive business plan are in place,” Lang said.

“Not only will these ascertain viability of the business forecasts, but also the feasibility of the business owner’s ability to make the necessary repayments. The business plan can also serve as a motivator to the business owners as they achieve the milestones they have set out for themselves in their business plan.”

Entrepreneurs, however, should not let economic uncertainty impact their ability to continue capitalising on the opportunities available.

“Research has shown that innovation and training has aided in increasing the growth orientation of a business during global economic recessions,” Lang said. “It also showed that the willingness to seek advice is a key indicator of businesses seeking growth in a pre-recession period.”

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