South African SMEs: Are You Funding Ready Yet?

South African SMEs are always enquiring about funding. If it’s not to start a business, it’s to grow into a new facility, product expansions, improved marketing or operation, or even digitising themselves. Yet, one of the biggest issues is that many businesses are not funding-ready.

Funding readiness means that a business shows a bank that you are a good investment. Banks or investors aren’t just sending money to a business without knowing they will receive something in return, such as interest or shares.

The reason funders set the minimum criteria for funding is also because it is an indicator of the applicant’s success in business.

One of the biggest barriers to funding access in South Africa is the lack of knowledge – Businesses don’t understand what their funding options are and how to meet their financial needs.

Two other factors are operational experience and their debt-equity mix.

Operational experience refers to how much business experience an entrepreneur has. This is important because someone with more experience is more likely to steer the business in the right direction than someone who has little to no experience.

The debt and equity mix refers to the debt-to-equity ratio. This measures the amount of debt versus equity in a company. Ideally, equity should be higher than debt.

There are many business financial documents that a business needs to have when submitting its funding application. These documents include financial statements, business plans, and cash flow statements.

Here’s the list of documents you need to have:

• Business Plan
• Budget
• Financial statements like cash flow projections, debtors lists, management reports, annual financial statements, VAT statement
• Latest Bank statements
• Proof of registration
• Tax certificates

The cash flow statement lists what income your business has over a set period. This is important to show the health of your business at the current point in time. It is often accompanied by a cash flow forecast. The latter predicts what the future cash flow will be, assisting with business planning and understanding how much money they will need.

One of the vital documents you have to have in place is your business plan. You need to identify your target market so you can understand where your clients’ pain points are. Once you have pinpointed this, you must develop your marketing strategy so you may add this to the business plan.

After completing the above details, you will need to ensure that you have a minimum viable product (MVP), especially if your business is a startup. With a prototype, you are able to test and improve your product without the investment of a fully launched product.

Lastly, you will need to gather feedback from customers, stakeholders, and industry experts. This will give you an idea about how your product will be received by consumers.

Following all these steps is important because it helps create an understanding for anyone reading the documents that your business shows great potential. Investors or funders can deduce from the available information that your business is worth investing in or funding.

Another point that funders are interested in is your financial ratios. With these details, you can analyse that the business is bankable.

Analysing a company’s financial ratios is one way of examining a company’s balance sheet and income statement. These ratios are essentially calculations that determine the performance, liquidity, operational efficiency, and profitability of a business. The six basic financial ratios are: the working capital ratio, the quick ratio, earnings per share (EPS), price-to-earnings (P/E), debt-to-equity (D/E), and return on equity (ROE).

When pitching to investors, you need a pitch deck. This is a concise and compelling presentation that outlines the key elements of a product, service or business idea.

Crafting a Compelling Pitch Deck

The goal of a pitch deck is to communicate to funders that you are worth investing in. For this, you must first understand what investors typically expect from funding-ready companies. It includes a business plan, accounting records, legal and compliance documents, along with other elements like knowing your market and having a clear plan for growth. That’s where a compelling pitch deck comes in.

What makes a good pitch compelling is the story that you tell to investors in an engaging and authentic way. This story shows how the idea came to be, how it will change lives and why you developed it. One element you can utilise is a great hook at the beginning of your pitch to get investors listening.

During the proposal, you must highlight how unique your business is, especially if you have a lot of competition. But what makes your business unique? Take time to demonstrate the problem and why your business is the solution.

Next, a solid business model is essential in making your garden a success. You need to tell investors how you and your team will make the business reach the intended goal, but the numbers should be realistic and obtainable.

Much like the old adage, practice makes perfect. This is no different for creating a compelling pitch deck. Soon, you will notice how your confidence is growing in your abilities.

Lastly, practise investor questions. These are the questions that investors will have about your pitch before they decide to invest.

Preparing for your pitch also means preparing for what funders might want to know. All these questions relate to the funding readiness of your business.

According to Mark Donnigan on LinkedIn, there are five types of questions that investors can ask. These questions are rapport-building, tactical, personal, financial responsibility and common investor concerns.

1. Rapport-Building Questions

These questions are aimed at finding your why. Funders want to understand that the entrepreneur is highly motivated to make their business a success. Questions may include:

• What unique experience do you bring to this field?
• Who or what influenced your vision?
• Why is now the right time for your solution?

2. Tactical Questions

These questions are strategy-focused. Investors may ask:

• What’s your customer acquisition strategy?
• How will you retain customers long-term?
• What metrics do you track for success?

3. Personal Questions

Personal questions provide insight into the people in the business. Questions can include:

• Who are the key members of your team, and what are their roles?
• How does the team handle disagreements or conflicts?
• What previous projects have you worked on together?

4. Financial Responsibility Questions

Because funds aren’t just given to anyone, financial responsibility is very important to businesses.  You might hear questions like:

• How will you prioritise spending if funds become limited?
• What are the specific milestones tied to this funding?
• How does this funding round fit into your financial strategy?

5. Common Investor Concerns

Investors may bring up additional questions to test your adaptability, future vision, and responsiveness to feedback. This shows investors that you anticipate challenges and can negotiate like a pro. Here are ten common concerns they may address:

• How do you keep up with industry trends and shifts?
• What’s your approach to risk management in uncertain times?
• What’s one recent example of customer feedback you acted on?

One of the questions that a business owner might have is, “How do I prepare my business to be funding-ready?” The answer is simple. You need to understand the funding requirements for each loan, grant or other form of funding that you are applying for and ensure you meet the eligibility criteria.

Whether or not you are eligible will depend on the different funding types you are applying for. Basic requirements may include factors such as organisational structure, mission alignment, and geographic location. Depending on their grant, for instance, gender might also be at play, seeing as some funds are only allocated to women.

Believe it or not, but many types of funding exist. The most popular is usually a loan, but your needs and fundability will determine which you apply for. Here are some of the types of funding that you can consider, as stated on the SME South Africa website:

Bootstrapping: Funding that is self-generated through the owner’s credit and personal savings.

Crowdfunding: This raises funds from the public in the form of donations.

Angel Investors: These are investors who bring wealth and connections to the table.

Venture Capital Investors: These investors provide capital in exchange for shares.

Seed Funding: Funding received in exchange for a stake in the company, specifically when a business is still in the development stage.

Accelerators: Accelerators help develop a business for a specific role.

Incubators: These create an environment for entrepreneurs to grow their ideas and ultimately their business, and only a few offer a monetary element.

Working Capital Loans: A short-term loan that helps cover day-to-day expenses.

Unsecured Loans: Unsecured loans are for anyone who doesn’t have collateral.

Bridging Finance: It helps rectify gaps in a business’s cash flow and takes the shape of a short-term loan.

Purchase Order Funding: This helps businesses to complete their orders before the invoice is fully paid.

Grants: Funding awarded by the government to develop businesses, and varies from a 100% grant or less.

Incentives: Incentives encourage the recipient to achieve a goal to be considered for certain advantages and preferential access to infrastructure.

Equity Funds: An investment that the government makes into a business with the promise of a shareholding percentage.

Sometimes, a business doesn’t get approved for funding for the simple fact that it made a mistake somewhere in the application process. Here are some of the common mistakes that applicants make during the process.

Mistake 1: Applying for Too Much or Not Enough Funding

Some entrepreneurs make the mistake of not applying for enough funding. Although a conservative budget can help you use funds effectively, fluctuating costs and project delays can cause you to run over. It’s thus vital to budget for these hurdles too and apply for a little bit extra, rather than being approved and not receiving enough funding.

Mistake 2: No Supporting Documents

Funders and financiers need to see that your business is worth investing in. For that, they use the many supporting documents to determine if you are a good investment or not. However, should you fail to submit all the supporting documents, they will be unable to continue with your application, and you will not be considered for funding.

Mistake 3: Unrealistic Financial Projections

Just as it is important to budget with additional costs in mind, it is important not to inflate financial projections due to your own ambitions.

Mistake 4: Importance of Cash Flow Management

Cash flow is an important part of your business. Think back to your first entrepreneur day; it wasn’t enough to have a table full of goodies to sell without having change in your money box. The same goes for business cash flow; it shows that you are able to run your business, even if sales aren’t doing that great. You have to have money that isn’t all tied up in assets and inventory.

Mistake 5: Ignoring Application Guidelines or not understanding

A huge hurdle for business owners is that the application guidelines are filled with difficult language or phrases that they don’t understand. That’s why it is important to be both financially literate and knowledgeable about the health of your business. You need to carefully follow the guidelines set out but the body you are applying funding to before you submit your application.

Mistake 6: Ignoring your Credit Score

Your business credit score tells lenders if you will be able to pay back a loan. With this information, you can also see how likely you are to be approved. Yet, many individuals forget to work on their business credit score to improve it. Many are then forced to take out a personal loan, but even your personal credit score can be a hindrance.

Mistake 7:  Poorly Written Business Plans

A business plan serves to indicate to a funder what your company does, how it does it and what the goal is that it is working towards. If your business plan is written poorly, it is unclear to funders what you are trying to accomplish, thus unclear why they should fund you.

Mistake 8: Inconsistent Information

If your budget, business plan and other documents don’t correspond, then it reflects poorly on your business. Ensure that all these tell the same (truthful) story to potential funders.

There are many industries in South Africa. Some funders only cater to specific funding needs, whereas others have less stringent application requirements concerning the type of industries.

The reason why certain funders only choose to focus on specific industries is because of the risks that may be associated with that particular field. Additionally, a funder can only fund a business in a particular industry if they feel that they have enough knowledge to make wise investment decisions.