I want to apply for finance- what is the next step?

John started his business after pitching his idea to some friends around the BBQ. He used all his savings for start-up capital, and family and friends provided loans. He could not apply for finance as his credit rating was not strong enough.

John’s scenario is not uncommon in the business environment. According to gviafrica.co.za, 3.3 million of the 5.6 million small businesses in 2018 were categorised as “survivalist firms”.

A few entrepreneurs have pitched their business idea to a group of funders, conducted market research, or developed a business plan and are not prepared to apply for finance.

John can implement some key strategies in his business to be able to apply for finance in the future. These strategies are:

• Develop a solid business plan to show his understanding of the industry, target market, competitors, and possible risks. Define the goals, strategies, and financial projections to demonstrate the revenue-generating activities and repayment ability.
• Use the available technology to streamline the financial functions in the business, such as invoicing and importing bank transactions into a cloud-based program.
• Maintain up-to-date and accurate financial records.
• Create a budget and manage the cash flow to demonstrate his understanding of the revenue streams, the costs and the working capital required.
• Monitor the financial performance against Key Performance Indicators to identify improvement areas and address financial challenges timeously.
• Improve the creditworthinesimmensely andess by paying accounts on time, the cash flow management will contribute immensely, and monitoring the report regularly to take prompt action on any issues encountered.
• Attending networking events to build connections with local banks or other financial institutions. He will be able to build trust and rapport with lenders, which will increase the likelihood of favourable terms.
• Explore alternative finance options such as crowdfunding, investors or grants.
• Consult with his accountant to provide guidance on financial management, and funding strategies and assistance through the process.
• Identify and assess if the business assets can be used as collateral for the loan. To be transparent ensure these assets are properly maintained and documented in an asset register.

Financiers usually consider certain criteria when considering a finance application. With the above strategies in place, John can apply for finance with confidence.

Financiers look for steady and increasing revenue over a period, they analyse the trends and consistency of the sales. As well as industry trends, market demand and competition. Most business owners do not want to pay taxes and are satisfied with a loss, but lenders favour positive and consistent profitability. A positive cash flow generated from operations showcases the ability to cover expenses, repay loans and handle unexpected challenges. Financiers compare the amount of debt to the amount of equity invested in the business. A low ratio is considered less risky. The total long and short-term debt are considered to determine the repayment ability. Current assets, such as inventory, trade debtors and cash on hand, in excess over current liabilities, such as trade payables, indicate the ability to cover the day-to-day expenses and unexpected expenses. Any business assets will be evaluated for condition, market value and liquidity. Various other financial ratios are used to evaluate the performance of the business. Often when applying for finance the business plan and cash flow projection are requested. These must be realistic to demonstrate the ability to repay the loan.

John can consider applying for finance, not only when the cash flow projections indicate a challenging period but when he can expand the business by introducing the product to a new market or launching a new product line or moving to new premises or improving the current premises’ infrastructure. Also, for purchasing assets. Sometimes inventory levels should increase to meet customer demand for a certain period or bulk purchase discounts are available. Additional finance may be needed during an emergency or unexpected situation such as breakdowns, natural disasters, or lockdowns.

A variety of finance products is available in the market, and it is preferred that the finance product match the lifetime of the asset financed. John should finance the equipment, vehicles and machinery with instalment sales agreements or lease agreements and property with a property loan.

Applying for finance is a scary thought for John and other business owners. By taking the next step to ensure the business can apply for finance with confidence, John’s business will not be part of the “survivalist firms” statistics.