SO YOUR SME GOT FUNDING: HERE’S HOW TO SPEND IT WISELY.
A lot is said about the ‘before’ of accessing funding for SMEs, whether it is deciding on what type of funding you may be eligible for such as government funding and grants, VC funding, bank loans or alternative financing or how to up your chances of securing loan funding, however not much is said about what happens when you are successful in securing funding or financing.
Alex Appleby, Head of Treasury and Risk at Retail Capital, an SME funder, offers insight into how to prepare yourself for additional funding or financing, from what you should use the money for and mistakes to avoid, to conversations to have with your accountant and team.
Good reasons to access additional financing and funding
Access to additional funding or financing is crucial for business owners to reach both growth and business targets.
The funding could be used for expansion purposes, working capital, a partner buyout or an acquisition. It can also include tapping into cheaper funding to settle more expensive facilities, that ultimately maximizes profitability.
Reasons business owners shouldn’t take on additional debt
It would not be prudent to take on additional debt to fund operating expenditure such as salaries or rental, unless it’s a short term liquidity gap.
It is also not recommended to service existing third party facilities that are perhaps in arrears, effectively borrowing from Peter to pay Paul. Borrowing should also be limited during emergency situations unless it’s absolutely crucial for a business owner.
The first thing a business owner should consider when the money hits their bank account
Ensure that the funds are placed in an interest-bearing bank account or money market facility if they’re not intended to be deployed immediately within the business.
Conversations business owners should be having with their accountant and the rest of their team when they do get a cash injection
It really depends on the nature and purpose of the cash injection. Assuming this relates to a lending facility, accounting and tax treatments should be considered, the timing of interest payments and ensuring adequate cash flow management is in place to meet monthly repayments or interest requirements.
The top 5 mistakes that SME owners make when securing funding or financing
(1) Taking funding from the first available funder without exploring all finance options available.
(2) Not understanding the terms and conditions of the financial product.
(3) Not securing the correct financial product for their business.
(4) Not assessing whether it makes financial sense to take on additional financing.
(5) Not understanding the financial impact on their cash flow to service such facility.
What business owners should do instead
a) Business owners should firstly understand their capital and debt requirements relative to growth and budgetary forecasts, which in turn requires business owners to explore financing solutions to meet such requirements in the most cost effective manner.
b) The financial product must ultimately meet the business needs in terms of price and tenor, however, this is dependent on the risk profile of the business or owner.
c) Clearly understand the terms and conditions to avoid any hidden costs that may arise at a later date, including early repayment penalties etc.
d) Ensure regular cash flow forecasting takes place to meet your debt requirements.
The ROI business owners can expect when the money is spent/invested wisely within the company
Returns will vary from business to business, however, business owners need to ensure their return on investment offsets the cost of funding to maximise profitability.
This article was first published by SME South Africa on the 3rd June 2019.