Wednesday, October 21, 2009

The Current Business Finance landscape in South Africa

Although many small firms have been experiencing difficulties in the current economic climate, both with trade and accessing business finance, many smaller businesses are booming. So what does the future hold for small businesses in South Africa?

Many entrepreneurs as well as other experts have said that we are through the worst, while other believe it may be that a W shaped, basically a short but unsustainable recovery. Trading conditions may continue to be challenging. Business finance from risk-averse lenders may continue to be an issue and as the case currently, Angel finance together with other types of funding may be the only option available to business looking to start or grow.

Given that small business account for 60% of all businesses in South Africa, it will be this sector which will help lead the country out of recession. But is the small business sector currently in a fit enough state to effectively kick-start the economy?

Many small businesses have not felt the same pain as larger businesses. Many continue to have good orders, profitable results and, if business financing were pre-arranged before the clampdown by the banks, many have little difficulty in continuing financial arrangements. Some smaller firms may struggle once the economy gets going again. The reason is simple: a growing business needs increased working capital - it needs cold, hard cash. Cash to fund the next sale, cash to fund the next increase in turnover.

A lack of working capital can lead to over-trading. Despite increased turnover and profits a business may not generate enough cash to cover its daily needs. It's a risk all companies face.
If a business has a conflict between profitability and cash flow, it must choose cash flow every time.

Being a profitable growing company also means a business has greater need for finance. As turnover grows, so stock grows along with the money owed to suppliers, tying up increasing amounts of cash in these areas.

So where can businesses get the finance they need to survive the upturn?
Banks are being tougher on businesses - reviews are more common, renewals tougher and banks are demanding increased security or other guarantees, suggesting shorter repayment terms or alternative finance options.

Banks want more information, projections and plans and on a more regular basis. If they don't like what they see, or don't see what they expect, they are increasingly likely to withdraw facilities.

Business Finance is out there. Businesses needing extra capital can look to peer groups or to venture capital. This venture capital comes from two major sources - business angels or Venture Capital funds.

These individuals or funds put up money for shares - and they risk losing the money if the project fails. Demand for funding is increasing and there is less money available, but people still want good businesses to invest in.

There is also the option of government support for business. Many of the schemes have had poor take-up, are confusing for businesses, or simply can't be effectively used by established or growing businesses.

Given the current recession, what do small businesses need to think about, and what should they do differently?

The simple answer is that nothing should be fundamentally different - the basics always apply in good and bad times: good cash-flow, good client relationships, being able to maximise profitability and having a reliable business plan. And lastly, businesses must be flexible, and take advantage of opportunities when they arise.

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