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How to successfully fund your SME business start up

Business
Most Small to Medium Enterprises (SMEs) businesses face significant challenges in finding the right kind and the right amount of money to finance their operations.

Most Small to Medium Enterprises (SMEs) businesses face significant challenges in finding the right kind and the right amount of money to finance their operations. Last week, we discussed the risks associated with debt financing for a start-up business, the role of personal savings, and the importance of internally generated funds in oiling your small business for success. Today we explore further useful ideas on how to creatively finance your SME enterprise with the right kind of finance, to increase the chances of success.

By Clive Mphambela

Selling off extra unwanted assets

As an entrepreneur, do not seek to borrow funds to start a business and yet to continue to hold on to those extra assets, such as a second car, a fixed property, a piece of land or other valuable items that you keep, but are not generating any cash for you.

Successful entrepreneurs will usually sell off such assets and inject the proceeds into their business ventures because they strongly believe in their business idea. When the business eventually succeeds, they can buy back similar or better assets.

This strategy can be rewarding because the funds you raise from selling such personal assets will essentially be your personal equity in the business and you can keep these funds in the business for as long as the business needs them, without pressure.

If you happen to have such assets, and you have a good business idea, don’t just sit on them. Liquidate them and inject the money into your business. It may just be the best decision you ever make.

How you can make the best use of trade credit

Rather than rushing off to get a bank loan to fund short term needs of your business, make maximum use of trade credit if it is available. Negotiate with some of your suppliers for delayed payment terms rather than paying for your inputs or raw materials in cash up-front. A good start is to pay part cash and then get the difference of your input supplies on credit terms. If you are lucky to get terms, try by all means to build your business’ credit standing by settling according to agreed terms. Your credibility and goodwill as a business can become a vital asset in future.

Certain types of businesses such as furniture manufacturing or shop fitting allow for the customers to pay a small deposit towards the work being done upfront. When you get the deposit apply it to raw materials and help ease off pressure on the funding needs of your business. Do not take the customer’s deposit and buy a piece of capital equipment or something else that has nothing to do with their order. This is a sure recipe for disaster. If you make it a policy to deliver the correct quality work, your customers will be happy to pay up the balance, making your cash-flow management easier.

How family and friends can help you finance your business

Your family and friends should be the first port of call, not only in developing your business idea, becoming your first customers and more importantly the first financiers of your business. Your business model, is also relatively secure with friends and family and they are less likely to hijack or steal your business idea.

This group of people is, therefore, a good source of patient capital. You may include those who are willing partners as equity partners by giving them some shareholding. Capital from friends and family can come in the form of gifts or interest free loans. If you are a member of a savings club, most of whom maybe part of your friends and family network, it will not be unreasonable to ask for a soft loan as long as you are committed to repaying it when it falls due. Also be willing to relinquish equity to an investor with funds.

Where can you get angel finance?

Some wealthy individuals are able and keen to assist a good business idea from a credible, honest and committed individual off the ground. These people can inject initial capital in a business and are known as “angel investors”. Angel investors are often retired entrepreneurs or executives, who may be interested in investing in start-up businesses for reasons that go beyond getting monetary return. They may simply want to keep abreast of current developments in a particular business area or may be motivated by mentoring future generations of entrepreneurs, and making use of their experience and networks. In addition to providing capital, angel investors can also provide valuable management advice, important business contacts and a useful mentoring role for the business owner.

FUNDING

Angel investors will normally take up equity in the business, but with a clear exit plan. Because they invest relatively small amounts into the business during its initial high growth phase they get very high returns.

Finally, a bank loan can save the day

I have spoken to a lot of potential businesspeople with pretty good ideas which they end up killing because they cannot get access to a bank loan.

However, when your business has gone through the above major phases of capital raising and has developed a reasonable trading record, it should be finally ready to approach a bank for funding.

However, you must make sure that your business plan is as clear in your mind as it is on paper and you have been maintaining sufficient trading and bank records. This information will help your banker to objectively assess the prospects of your business. (Refer to our article on SME Finance entitled “Record keeping crucial for successful SMEs”).

In summary, only demonstrated commitment by the major shareholders or promoters of the SME, as shown by risking their own resources, a good operating track record and a viable well documented business proposition with clear future prospects, will make your SME a good candidate for a successful bank loan application.

We have not yet exhausted potential funding strategies for SMEs, in the next instalments, we will discuss further concepts in small business finance, such as venture capital, franchising and crowd funding. We will also discuss the how the power of the stock market can be harnessed to promote the growth of SMEs.

l Clive Mphambela is a banker. He writes in his capacity as the advocacy officer for the Bankers’ Association of Zimbabwe. BAZ expressly invites players in the MSME sector and all other stakeholders to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686, 0772206913