SMALL BUSINESS Fuel for
SMALL BUSINESS Fuel for growth Why access to capital is important for SMEs Regardless of the size of your company or how great your product might be, at some point every business will need more finance than they have immediately available. When this happens, accessing additional funding will help to give your company the fuel it needs to grow. It may seem counterintuitive, but Trevor Gosling, co-founder and CEO of Lulalend – financing partner to South Africa’s smallto-medium enterprises (SMEs), explains that fast access to capital plays an important part of any business growth strategy. Gosling says that there is often a misconception that all debt is bad or that it is only used by struggling companies. “In fact, the opposite is often the reason why some of the world’s largest companies routinely seek capital infusions to drive growth, keep profits within the company and assist with short-term financial obligations.” When raising funds, the financing option selected will play an important role in determining how a business accesses capital and its long-term profits. “For business owners, debt can help to improve the bottom line of a company because it makes expansion possible. It can enable increased marketing efforts or the purchasing of new equipment and products,” says Gosling. Loans can also support seasonally-driven companies that are often extremely profitable during peak-season trading but need the extra cash to buy inventory and supplies during the quieter months. This is where debt can help to bridge the gap and balance out uneven cash flows throughout the year. Generally, the two most common ways in which debt is raised are through selling equity in the business or with debt financing. For many of South Africa’s burgeoning SMEs, what matters most is the overall cost of business funding and the speed at which it can be acquired. While both financing options can help to give access to capital, using debt to support growth rather than equity is generally preferred. As Gosling explains, “While you will owe interest on debt, unlike equity, the funding that it provides doesn’t mean you will have to lose a stake in your business. Any profits that are made will be yours to keep.” Additionally, if you choose to take on a partner to increase capital, it will also mean that you lose full control of your business and you will be asked to share profits in the future, which for many fast-growing start-ups is not an attractive option. While fixed-term loans are a great tool to finance inventory or equipment purchases, an increasingly popular debt instrument is a business line of credit, or Credit Facility. Gosling says that a Credit Facility is one of the best ways to manage cash flow, especially if a business needs immediate access to funds to cover short-term expenses while waiting for customer payments. Have a plan to use additional funding If you manage your debt responsibly by making on-time payments, this can also help to improve a business’s creditworthiness. In turn, these smart credit habits can help to increase your overall spending limit, lower future borrowing costs, and help you to obtain better terms for future loans. “The critical step that business owners need to consider before taking on any form of debt is to ensure that they have a plan on how to use any additional funding to generate a return and improve profits,” Gosling explains. “If you don’t have a plan, or if you feel that the company is struggling financially, taking on debt for the wrong reasons can cripple your business,” he adds. To assist businesses to recover and grow during these difficult times, Lulalend is offering its first-time customers the opportunity to take out funding but only start repaying after 60 days, which gives them two months of cost-free capital. “It is not just about your bottom line. If done correctly, responsible debt can grow your company and give it the strategic advantage needed for a profitable future,” says Gosling. 22 | www.opportunityonline.co.za
