Learn the new rules of business funding

The small business rollercoaster has been particularly rough over the past two years and the few that managed to stay afloat will agree that access to the right financing at the right time was key to their survival.

A popular pandemic pivot was to turn to e-commerce, and many businesses applied for funding to facilitate that change. Survival over this period was linked to the business’ ability to act quickly on the opportunities – by accessing finance fast.

Awareness and knowledge of the different financing options available is vital for any start-up or entrepreneur.

“The general perception among small business owners is that accessing loans is difficult and limited to the traditional banking fraternity, that applying for financing is complicated, and that they would need substantial collateral to obtain the financing,” says Rean Bloem, General Manager of Funding at Retail Capital.

“This is only true if they are approaching formal lending institutions such as banks for a business loan.”

Alternative lenders such as Retail Capital have disrupted traditional business funding models through innovative use of technology. This revolution has made business funding more accessible, made the process faster, and created an environment that supports SMEs instead of stifling them.

Two steps to a successful funding application:

Have a good credit profile. Paying third party vendors or suppliers on time will help build your business credit profile.

Have a digital footprint. Readily available digital records will increase your chances of obtaining funding. Convert as much of your business to digital with point-of-sale machines and online/cloud-based accounting services so you have a quick reference of your business operations.

The key differences between a loan and funding are that loans will have rigid conditions attached to the payment terms and require security, whereas funding payment terms are far more flexible, and the business owner and funder jointly decide how best the money can be invested back into the business.

Understanding the difference between a loan and funding is the first step to choosing the right path.

There are several financing options available depending on which the business is in (plan/idea phase, start-up, growth/expansion, etc.). Each is vastly different and will benefit from different funding models.

Business owners should familiarise themselves with the assorted options and pay particular attention to the risks and benefits related to the lifecycle of their business.

  • Private loans from family/friends. These loans are often unstructured and limited to the amount available. There could be an expectation that they will be paid back within a short time at a rate of interest higher than through a financial institution.
  • Bank loans (Overdrafts or fixed period loans). The amount available is limited by the security the SME can offer against the loan, i.e. property, fixed assets, and insurance policies.
  • Term financing. Also known as “hire purchase” or “leasing” and the kissing cousin of bank loans, but for term-financing of moveable assets it’s the asset that acts as the security.
  • Private equity investment. Private investments are offered based on the potential for success in the market as presented in the business plan or judged on the track record of the entrepreneur.
  • Asset Finance. Asset finance can come in handy when you don’t have the capital to buy an asset. It’s effectively the same as hire purchase or leasing.
  • Merchant Cash Advance. This type of business funding is designed to help businesses gain access to the cash they need in a fast and flexible way. The funding is paid back through a percentage of its future turnover/receivables, does not require any security and can be used at the discretion of the business owner.

Disclosure: Retail Capital was one of the first Merchant Cash Advance funders in South Africa and has disbursed more than R4 billion to more than 38 000 SMEs; the company supplied the research and expert insight for this article.

Read more: How SMMEs can leverage fintech to get a leg up

Featured image by Christina @ wocintechchat.com/Unsplash 

Lindsey Schutters


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