There is a simple reason for the lack of available finance for SMEs, and that is the associated risk involved in the financing of these businesses. Although there are good reasons why entrepreneurship should be nurtured and developed from all angles, one also needs to be realistic about the facts.
The big issue is risk profile. When asked, an entrepreneur will always be enthusiastic, but this is what a financier is hearing:
- Entrepreneur: I have a viable business concept.
Financier: It is a new product or service untested in the market.
- Entrepreneur: I have some assets to back-up my loan.
Financier: The format of these assets is unacceptable for security purposes. Second bonds on properties with large prior bond values, stock, second hand equipment, policies with no cash value, etc.
- Entrepreneur: I am an enthusiastic, energetic and highly motivated person that is dedicated to make it work.
Financier: You have no or limited business experience
- Entrepreneur: It was a tough year, but I am still around.
Financier: You made losses in your business and your gearing is high.
Sounds familiar? The long and the short of it is that financiers regard small and medium enterprises as high risk. It is commercially risky and the potential income compared to the potential loss is out of balance.
If so, where do SMEs obtain their finance? Around 60-70% raise their funds via internal means. This means through their own savings, bonding properties, selling assets, using pension proceeds or borrowing from friends and family.
There are, however, organisations (locally and abroad) that specialise in SME finance.
Business Partners Limited is one of them. As SME finance specialist the focus is placed on viability and the overall approach is entrepreneurial. We firstly assess whether the business will be viable, whether it can go from start-up phase to an established, running business. The finance need of the business will then be established, and finally we will look at how this need can be satisfied.
Before any finance is offered to an SME, our team will probably spend about 40 hours on the viability assessment, ensuring that both Business Partners Limited and the entrepreneur are taking a calculated financing risk.
SMEs have very specific needs, and one must have an understanding of these, and the greater commercial world, if one wants to offer a worthwhile service. Business Partners Limited has just about seen it all; not only the success stories, but the business failures as well, and has assisted in building expertise. In my view the one factor that makes or breaks an SME is the entrepreneur. Even a good concept or established business in the wrong hands, is a recipe for disaster.
Article written by Gerrie van Biljon – Executive Director Business Partners Limited.