Obstacles in financing small businesses

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Small and medium-sized enterprises (SMEs) and entrepreneurs are critical for creating new pathways to sustainable and inclusive growth of economies.
This is due, in large part, to the unique role played by small and medium enterprises in developing and diffusing new innovations and providing employment. However, these small businesses can only fulfil these roles if the financing necessary to start and grow their business is made available.
Access to finance represents one of the most significant challenges for small-scale businesses. The turbulent times in the Zimbabwean economy today require that these small enterprises, which are in effect shock absorbers for the economy, be granted special attention and support, particularly from the formalised financial institutions, so that they can continue to play a meaningful role in the economy. In this vein, addressing challenges faced in financing SMEs becomes a worthwhile endeavour, which is critical in order to improve the well-being of the economy.

However, many small businesses find that attracting funding from either lenders or new investors is a mammoth challenge. Not only do small businesses suffer from credibility issues when they try and attract capital, but they also endure endless internal deficiencies. In this article we want to take a crack at some of the issues that entrepreneurs can tackle so as to position their business to attract potential financial backers?

Here are some of the many small steps that a small business owner can take in order to improve the chances of attracting capital and credit.

Always present a professional financial picture of your business

Many small businesses take this aspect for granted. Try and have your financial statements audited, or at least reviewed by a professional auditor every once in a while. Try and keep financial records for the prior three years of trading.

The independent validation of the financial performance of your business’ numbers and processes by a qualified accounting person will greatly improve prospects of your business earning financial credibility. Most importantly, most potential investors in your company and potential lenders such as banks will have greater confidence in your business if the financial statements have been certified by a professional. This will save you a lot of time, cost and potentially increase the available leverage your business can get.

Manage costs very tightly

Financial discipline is key to the success of every business. Every dollar that your business retains as cost savings will translate into profit, increasing the value of the business and its cashflow strength. So it is very important to eliminate excess costs.

This may seem rather counter-intuitive that a business must reduce costs to prosper, but it is an essential part of showing careful financial control by the business managers. Retaining cash and maximising cashflow will make your business more attractive to investors and bankers.

Ideally, a business should operate for at least a year to prepare it for outside funding. However, once the decision to seek external investors is made, you should try as much as possible to eliminate any unnecessary costs if you can. It is advisable not to take a gradual approach to cut costs but instead, you must cut costs as a matter of day-to-day endeavour.

Be honest about the level of funding required

Many business owners will approach funders, but will typically overstate the financing requirements of the business. This is fatal and can lead to over indebtedness or other ills. Always be sure that your stated objectives for raising extra funds match your personal objectives and investor expectations.

In the fundraising process, you are going to be telling your story over and over again. Make sure that the story you tell prospective investors and financiers on why you need the extra funds is consistent with the reality of the business and its environment. State clearly why you want to expand your business, what your eventual exit strategy or repayment strategy, if you are negotiating a loan, is, and what you want to do after that. If not, potential deal-killing issues will arise further down the path of negotiations.

Have qualified managers in your business

Company leadership and the depth of management skill is one of the greatest concerns of most financiers. Bankers and buyers of equity in your business will worry about the quality of management in your business. If you are selling out completely and are not going to be part of the future of the business, any new investor or lenders would want to have confidence in those who are going to remain behind managing the business. The ideal scenario is that your business should be able to grow and flourish even without you there.

Have a documented and actionable strategic plan that shows growth

Without question, the more potential an investor believes your company has, the higher the valuation you will receive when you raise capital. If you have a believable, actionable strategic plan that shows significant growth, investors will be excited. The important thing to keep in mind is that your plan should be both ambitious and reasonable. Investors will be turned off if you present them with farfetched numbers or if you fail to acknowledge market realities.

Meet investor expectations

It is important to attain and if possible to exceed your annual revenue budget, particularly prior to and during the fundraising process. This also is about buyer and lender confidence. If, during the sale process your company does not hit the numbers you said it would, investors and lenders will begin to doubt and second guess the entire transaction. If, on the other hand, you beat the numbers, they become afraid of losing the transaction and may work harder to close a deal as quickly as possible.

Deepen your business’s sales capability

A common weakness of small entrepreneurial companies is a lack of deep sales talent, which goes beyond the owner, not to mention the lack of a formal documented sales strategy. Do not be your business’ best or only salesperson. If your business can develop a sales department that can close deals and increase revenue while you as the owner are busy with other things (or on holiday, for that matter) investors and bankers will have much more confidence in financing your enterprise.

Patience is an asset

Be patient. Raising outside capital almost always takes longer than you may wish as the entrepreneur. The typical equity fundraising process can last for months, or longer, particularly if your company is still in the start-up stage and lacks a track-record of meeting its financial goals. You must be mentally prepared for a long and winding negotiating road paved with rejection. There will be countless economic, legal, and emotional hurdles that you will have to overcome to get the best result for your business.–newsday

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