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Tips, advice, and information for South African business owners

28 Sep

Funding An Insolvent SME

Funding a small business is challenging at the best of times since it’s an inherently risky investment. Funding an insolvent SME is an entirely different proposition that borders on the impossible, but can still be done under the right circumstances.

Several years ago, we were approached by a small manufacturer that needed to buy some machinery. The company was insolvent at the time due to accumulated losses, but institutional debt was limited and the owner’s turnaround plan was sound: replace obsolete packaging and moulding equipment to increase production output, fulfil larger orders, and grow revenue more profitably.

The challenge, of course, was raising the capital for the equipment which cost almost R500,000. It wasn’t a staggering sum, but the business had nothing to borrow against: equity, profit, and cash flow were all negative. The owner was willing to make a sizeable deposit, but this wasn’t enough to reassure commercial lenders who were more concerned about the company’s present circumstances than its future potential.

Trying to finance projects like these through conventional channels is an exercise in futility. Instead, you’re better off approaching higher-risk investors like government agencies or enterprise and supplier development funds. For this particular client, we identified a non-repayable grant funding program managed by the Department of Trade and Industry.

When drafting the funding application on behalf of our client, we emphasised three things:

First, the business satisfied all of the DTI’s qualification criteria (you’ll be surprised how many budding entrepreneurs overlook this seemingly obvious initial step!)

Second, our client had a sound growth strategy: we used actual production, pricing, costing, and sales data to build an accurate forecast that validated the commercial merits of the investment (government agencies will finance riskier projects, but they won’t back vague speculation so you have to do your homework).

Third, the expected growth would have a small but positive socio-economic impact, including job creation and household support (which commercial lenders won’t prioritise highly, but is obviously integral to government agencies and similar investors).

The application process took several months (which is par for the course with government agencies), but was ultimately successful. The DTI approved our client’s application and contributed a non-repayable grant of just over R200,000. This rebate of almost 50% enabled our client to set aside more cash for working capital, which compounded the production benefits of their new equipment.

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