Got mates? Research has shown that the biggest source of financing for small business owners is friends and family. But sometimes that well is running dry, or the nature of your financial need has outgrown what your acquaintances can offer you. Whether you’re starting up your business or expanding, there are certain times in the life cycle of every company when you look to attract finance from the formal sector. Here are some things to bear in mind as you go about it.
Consider bringing on a part time CFO to help you attract the finance you want
In order to convince banks that your company is worth lending to, you need to speak their lingo. Hire a part time CFO or equivalent to help you get the documents together that tell a compelling financial story about the business. Not only can this person help ‘write the story’, they can also ‘sell’ the company to future investors.
Identify your collateral
This is one of the first laws of finance: your financial institution needs assurance that, if things don’t go the way you expect, there will be some way of getting their money back. Your part time CFO should spend some time evaluating your collateral and determining what can be offered to the bank to the value of what you are hoping to borrow. This could come in the form of property, equipment owned by the business, or existing savings. The Small Enterprise Development Agency (Seda) makes this observation: “The smaller your business, the more collateral the bank will demand, because you are perceived as a high risk. Ironically, of course, the smaller you are, the less collateral you are likely to have.” Now could be the perfect moment to call in favours from friends or family members – they might not have money to lend you, but could own property that they would allow to stand as guarantee.
Prepare a detailed business plan and presentation
By this stage, you’ve likely already put together a business plan. But your part time CFO should spend some time drilling into the details. Banks and other lenders will want to know how much you need to borrow, when and why.
Have your part time CFO play the part of the banker or loan officer, and interrogate your business plan. He or she should criticize where necessary and ask you to motivate for your decisions. Once you can confidently hold your own in this setting, you’re more likely to feel comfortable and prepared when you meet with the real lenders.
Get your eggs into as many baskets as possible
Apply to several institutions at once. The review process is lengthy and tedious, so you can’t afford to apply to your lenders one at a time. You’ll notice similarities in many of the loan application processes, but enlist the assistance of your part time CFO to make sure you spot the differences too. Take the time to write out a strong motivation upfront – this could favourably predispose the decision-maker to your request.
Think wider than banks
In today’s tough economic environment, small business divisions in banks are becoming more and more picky about who they award loans to. So, the big banks are the obvious place to start, consider other options, listed below:
- Enterprise Development programmes. Many big corporates have begun to fund small businesses as part of their Black Economic Empowerment (BEE) requirements. Have your part time CFO take a look at your black ownership and turnover in order to see if you qualify for assistance from such an organization. Generally, if your company has 51% black ownership and a turnover of less than R50-million you could qualify as a beneficiary.
- Government-mandated small business loan organisations such as SEDA and the National Empowerment Fund also provide funding to qualifying businesses. Your part time CFO should determine whether this is an option for you.
- Venture capital funds. Investment companies that see potential in good businesses will trade equity for a share in the business. If you’re considering this route, your part time CFO should delve into the suggested terms of engagement. Ensure this is a partnership that you can live with in the long-term.
If your business is looking to attract funds and you need the help of a professional to do this, get in touch with The Finance Team. Our finance executives can provide you with interim or part time assistance according to your needs, and help you secure the money to grow.