Alternative funding solutions can bridge gaps for SMEs

Charles Meyerowitz

SMEs have been identified as drivers of inclusive growth and development in South Africa, providing employment for up to 60% of our labour force and contributing over 30% of GDP. It is, therefore, concerning that, according to Bloomberg, eight out of ten businesses fail within the first 18 months and the remaining 20% of those find it increasingly difficult to survive due to the current constrained South African economy.

According to Charles Meyerowitz, co-founder and CEO of speciality asset backed financier Lamna, SMEs can go through various stages financially during their growth and development. “These stages form part of a business’s natural life cycle – as they develop from a small enterprise, where capital is generated either from family, friends or personal savings; through to mature businesses making use of more established sources of finance for growth”.

According to Meyerowitz, each stage of a business comes with its own set of challenges in terms of funding. “The development and conception stage can be difficult and many SMEs require some kind of financial assistance to get their feet off the ground,” he says.  “Business owners usually apply for a loan from a bank or investor during start-up stage, however, due to current economic pressure, many lenders have adopted a more stringent policy when it comes to providing loans”, says Meyerowitz.  “In these cases, SMEs should consider alternative lending solutions that don’t require taking on excessing personal risk,” he says.

Meyerowitz says that during the growth and establishment stage of the business, there is profit but very little access to cash because everything is directed back into growing the business.  “This is a tricky stage because cash flow is limited and although businesses do not want to be turning away sales or orders, they may not have the cash to see it through,” he says. “This is where business owners need access to quick liquidity solutions.”

He explains that asset backed lending, for example, uses existing assets as collateral rather than on the business and financial history or personal surety. “Using lazy assets such as vehicles, valuable jewellery or fine art as collateral will help a business bridge the gap during difficult times.”

Meyerowitz encourages SME’s to put good processes and practices in place early on to manage cash flow. “This could be setting efficient payment terms with suppliers and clients, keeping up to date with trends for efficient cash flow and ensuring the business uses technology that will make payments and invoicing easier for both the business and client.”

Meyerowitz warns that although there is often a rapid development in both revenue and cash flow during the growth and expansion phase, businesses should be wary of becoming too comfortable as unexpected cost could always arise. Should this happen, businesses should explore alternative funding to bridge gaps instead of taking on excessive long term debt. “What is key here is to avoid lending solutions that incur personal liability,” says Meyerowitz.

According to Meyerowitz the final life cycle stage of a business is known as Maturity and Possible Exit stage. Having navigated through the expansion of the business life cycle, some companies continue to grow while others might struggle financially, or simply want to remain a certain size.  “There are several exit strategies for small businesses which include, having a family member take over the business, selling your business to managers or employees or selling to another business or investor,” says Meyerowitz. “It's critical for SMEs to have done their homework in terms of correctly valuing the business as well as ensuring that any contracts are scrutinised properly so that there are no unnecessary financial shocks.

“It’s important to remember that not all SMEs experience every stage of a business life cycle, and some may experience part of a stage and in a different order.” He concludes that the small details are often the most important; especially in terms of finance. Meyerowitz adds that cash is king for SME’s and that if you don’t have the cash in the bank, ensure that you have a plan to get quick access to it. “The devil really is in the detail. Being organised, transparent and critically evaluating decisions before they are made will help SMEs overcome challenges in any business life cycle.”