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Tips, advice, and information for South African business owners

10 Apr

Next Generation Finance

Whether you need working capital or growth capital, where can you go to finance your business?

Most entrepreneurs assume that there are just four options:

1. Their bank.

2. Government agencies.

3. Venture capital.

4. Their personal cash reserves.

For a very long time this was, indeed, the full extent of the business funding landscape. However, that has changed dramatically over the last several years with the proliferation of crowdfunding platforms, peer-to-peer lending, angel networks, and investment forums.

You may be aware of these already. But in addition to these, a new generation of commercial funders that specialise in SME finance has developed largely unseen. You’ve probably never heard of them, but there are well over a hundred of these investors (with more emerging all the time). Collectively, they solve three crucial funding constraints: speed, flexibility, and risk.

Banks can easily take weeks to process finance applications, even for something as trivial as an overdraft facility. Venture capitalists are rarely much better, while government agencies are considerably worse with turnaround typically averaging three to six months (sometimes much longer). By contrast, you can expect an answer from a private specialist funder within a week or two (and sometimes as quick as a day or two).

Specialist funders are also much more flexible. Unlike banks, they won’t just look at how much collateral is on your balance sheet. They aren’t obsessed with extreme returns like VCs, or pigeonholed by rigid government investment policies. Instead, they will holistically assess your company’s current position while also taking future earnings potential into consideration.

This flexibility enables them to finance projects that most banks consider too risky. Many growing SMEs can’t fully collateralise the finance that they need (let alone satisfy the over-collateralisation requirements that banks sometimes insist on). However, collateral is not the be-all and end-all for specialist funders. Some of them prioritise cash flow, profitability, or other metrics. And if collateral is required, they are usually willing to negotiate and consider a wide range of possibilities.

Faster, nimbler, smarter: this next generation of funders is one of the primary reasons why I am so optimistic about the future of small business in South Africa. Promises of small business development from government officials may amount to nothing more than political lip service, but there are plenty of professionals in the private sector who are putting their money where their mouth is.

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