Credit, cash flow and loans are trigger words for the entrepreneur and SMME in South Africa when the waters get deep, and these become panic words for most. The rise of fin-tech and micro-financing makes the lending landscape look like an easy way out; independent lenders proclaim easy, quick-fix solutions that will help business owners sleep better at night - until they read the fine print. “And often, we don’t read the fine print,” says Sandra Beswick, a Senior Business Rescue Practitioner and a Director of Fluence Capital
Struggling SMMEs take out loans without a comprehensive understanding of the impact of the repayments on the business and how the interest rates may squeeze the profit margins in the long run, inevitably crippling the business and its ability to keep afloat. With statistical data released by the South African Reserve Bank stating that only 25% of total business loans are allocated to SMMEs, Beswick warns about ‘too good to be true offers’ with the alternate and proverbial ‘quick loan’ scheme.
It is understandable that ‘quick loans’ appear as an attractive source of financing compared with traditional banks. Banks are risk averse by nature and are highly regulated with stringent criteria, such as a minimum of 12 months in operations. According to SMME South Africa, businesses are rejected for funding primarily based on a lack of financial readiness and limited collateral, which is why the shiver of independent lenders have swum their way closer to SMME shores.
Every business owner knows the dreadful panic that ensues as the month draws to a close. Employee salaries are due, and suppliers need to be paid. “But panic also makes us blind and possibly a little naive too,” says Beswick. “Admittedly, any income opportunity looks like a life jacket in a crisis, but ‘crisis’ is a man-made thing,” says Beswick. “Our business is only in crisis when we’ve missed something along the way when we have not taken measures to plan correctly.”
The low barriers of entry provided by the new financing structures, such as fin-tech and micro-financing options, are convenient, but at what cost? When it comes to cash flow and loans, every business needs to do the maths to maintain good ground. Whether it’s a banking institution or an independent lender, there are multiple factors to be considered when applying for a loan other than jumping at the shiny, low monthly repayment amount.
Beswick puts the record straight:
Are independent lenders just a big scam?
No. There may be some lenders out there that are not legally compliant, but not all lenders are “sharks”. Credentials and compliance are everything when dealing with a lender. Dealing with a fully legal, fully regulated lender is your first port of call. To start, every lender must comply with the regulations set out by the Financial Sector Conduct Authority (FSCA) and National Credit Act. Check them out!
What’s a major red flag for any SMME loan?
Watch out for “Personally Liable” by providing sureties or guarantees: a term that could have detrimental effects on you and your business. Should your business not be able to pay back the loan repayment, and you are forced into business rescue or liquidation, you, as the owner, will have to use your personal assets to offset the losses of the business. For smaller SMMEs, this could mean losing your family homes too. It is important to note that all lenders, banks included, have red flags in their structures (some more than most!).
The bank rejected me, what options do I have for a business loan?
Don’t panic. For “micro businesses”, you could extend your search to include government grants, personal loans and micro-financing options. These exist, but always with terms and conditions. Firstly, always read the terms. Secondly, always read the terms.
Financial institutions offer borrowing against your debtor’s book. Is this a good idea?
Financing your business this way may be beneficial, to begin with, but the benefits don’t last very long. Once the bank fronts you a percentage of the debtor's book and you are unable to pay, it costs you more on the interest rate that they’re charging - and interest will cut into your profits. Meaning: your business may become stagnant and unable to grow.
Can I ask my lender for a better, more customised funding model?
Of course, you can. And you should! For most reputable lenders, there are options to restructure your payments to avoid the impact of high interest rates. For instance, loan repayments can be restructured so that the interest portion is paid monthly, and you have a moratorium for a few months on paying the capital amount until your cash flow improves. This allows your business space to adjust and recuperate. Take charge of your loan structure - if you don’t ask, you won’t get it.
How do the banks determine if I am eligible for funding?
There are many factors associated with the financial viability of a business. Banks will go the whole nine yards to assess your risk profile. Larger corporations have greater credit histories and adequate security, making them a safer option for banks. For SMMEs, the whole business is taken into consideration; the market they operate in, the business life cycle and seasons – including cash flow and credit or risk profile. In a way, you can thank your bank for being this protective against risk - it warrants safer, transparent grounds for a better bank-business relationship going forward.
Should SMMEs be wary of the “Quick Quote”?
Definitely. The speed of the “Quick Quote” becomes a striking option, but it’s easy to over commit, trying to keep up with one loan by taking up another. This is dangerous water! Be wary of signing anything too soon. Funders outside of the traditional banking route are less likely to offer comprehensive documentation, so take time to do the calculations for yourself first. Prepare adequately for your lending contract and compare different lending structures to find the best fit for your business.
What does interest have to do with anything?
Everything! The real impact here, other than the structure of the financing model, is the interest rates applied to the principal amount of the business. How much will you actually be paying back in the long run? This is the question. Even if your monthly payments may seem smaller than that of traditional funding structures, do your calculations - you may end up paying much more than the loaned amount without ever stabilising your cash flow.
What happens if I can’t make my monthly repayments on time?
Three rules when it comes to this:
1. Communicate.
2. Communicate
3. Communicate.
It is all about honest, upfront communication – with all of your creditors. The worst thing a business can do is wait too long, loan more money or hide from the fact. Banks hate surprises – fact! All lenders do. Have the conversation with your financial partner ahead of time to figure out a more viable option to support your repayment plan. Pro-tip: there are always options, trust me.
I’m in so much debt - how did this happen?
Firstly, there is no shame in debt. Debt is a fact of business life. There is good debt and there is bad debt, and both must be properly managed. Getting into bad debt is kind of like today’s assignment due at 8am – the one you left until the last minute; you didn’t plan properly, and now you’re scurrying to hand it in. There can be only one outcome here: you fail. Because, here’s the thing about debt: debt doesn’t manage itself. You are in charge. You are always in charge! And here’s the good news: ‘Debt’ is something you can control and survive - bottom line.
A quick fridge magnet summary?
- Do your research.
- One loan at a time
- Timely Communication is everything.
- Keep a record of all sureties you agree to provide.
- Always compare structures – ask for what you need.
- Plan way ahead - calculate for the long run, not the short-term challenges. Planning is a constant.
PERSONAL FINANCE