Who would have thought two years after the onset of Covid-19 that corporate recovery would deliver to the South African Revenue Service (Sars) a 25% improvement in revenues over the previous fiscal year?
The financial results from many sectors of the economy are outstanding, particularly in the commodity sector.
Sadly, the same is not true among smaller businesses.
Michael du Plooy, chief operating officer at Preference Capital, a company that is disrupting the small and medium-sized enterprise (SME) financing sector, says there is plenty of evidence that small business balance sheets have been left depleted as a result of the Covid lockdowns.
“In 2017, well before Covid hit us, we already started to see some deterioration on SME balance sheets, but the situation became far more critical over the last two years,” he says. “Companies that did not have a war chest or a decent equity layer were hit hard by Covid. We saw a vast amount of restaurants closing over the last couple of years. It has been devastating.
“Businesses with bigger balance sheets that would not normally consider coming to us for funding assistance found themselves under cash flow pressure, and had to reach out for help.”
Though revenue growth is now on the mend as a result of the post-Covid spending recovery, a closer examination of SME financial statements shows this is only papering over some deep-rooted problems.
“Lenders are having to compete for a smaller pie. Businesses may have good revenue growth now, but cash flow remains a serious issue for many. We’re seeing debtors books with invoices outstanding for 120 days or more, still not written off, and suppliers are sitting with extended credit terms. In other words, these are some of the classic signs you would expect to see leading up to business failure.”
Du Plooy highlights the three principal mistakes small business make that can lead to business failure, and how to avoid them:
- Make sure your personal credit is in good order. Many owners of small businesses don’t realise that their personal credit behaviour heavily influences their business credit score – something all lenders look at. Keep personal and business finances separate, and make sure you maintain good financial housekeeping on your personal accounts. Some key things that affect your credit score: overdue personal accounts, judgments of any size, length of business ownership, and degree of creditor enquiries.
- Have someone around who will challenge your ideas, particularly those ideas that will cost the business money. If you’re about to make a business decision that is going to cost money, ask yourself: does it make economic sense, and will it turn a profit? Get a second or third opinion from someone who is prepared to challenge you. Entrepreneurs tend to be extremely optimistic. Having someone that can play devil’s advocate might bring your lofty high-stakes idea down to a more conservative level.
- Have a war chest and avoid the common cash flow mistakes.. To most lenders, your business’s value is measured by the strength of your balance sheet. We see many SME owners running a lifestyle business, drawing as much money as possible from the business without retaining funds in the business. The problem with this is that as soon as an adverse event comes your way the business has no reserves to help it through the hard times.
There are only two sources of funding, adds Du Plooy: equity and debt. “Some situations call for an equity investment where friends and family are probably your best bet, and other situations call for the correct use of the correct debt finance product. Understanding which is the correct option is crucial for building a sustainable business.
Traditional banks have a reputation for being unfriendly to smaller businesses, as well as being slow and conservative in their decision-making. Part of that conservatism is born out of their need to comply with banking regulations and because their cost structure is set up in such a way that to service a small business simply isn’t worth their time.
Preference Capital was formed in 2014 with the express intention of disrupting the SME financing market.
It does that not only by providing the needed finance, but by advising the company and business owners on how to clean up their balance sheets and build a solid base for growth going forward.
It is the advice and customer service that separates Preference Capital from most competitors, says Du Plooy. “There are other sources of financing, but what we bring is a huge amount of expertise – having dealt with so many companies over the years,
“…we’ve been able to formulate countless debt finance strategies that have given businesses a new lease of life. That’s where our real value lies.”
Cash Flow Capital offers working capital up to R10 million in the form of unsecured short-term business loans as well as the more traditional trade finance product. The short-term product focuses heavily on the cash flow of a business and less so on the balance sheet to make a quick and informed decision on funding within hours. The trade finance is perfect for a client that has a mismatch of when stock needs to be ordered and paid for, compared with when cash is actually received from debtors. “Together with our forex offering, we’ve built a powerful product for the SME market,” says Du Plooy.
Preference Capital Asset Finance offers competitive asset finance options for revenue-generating assets. The asset finance team literally has centuries of [collective] experience and is able to bring private-banking deal-structuring to the everyday SME.
Bizcash offers invoice discounting, supply chain finance and property finance. The BizCash Fintech processing and integration system creates an end-to-end customer experience that is able to approve and provide funding in a matter of minutes.
Change Financial Solutions is a treasury outsourcing company that offers forex and risk mitigation strategies to the SME market – the kind of service normally reserved for much larger companies.
“Together as the Preference Capital group, we try to pull on the expertise of all these teams when considering finance for a business,” says Du Plooy. “This means we’re able to impart an enormous amount of knowledge and, more importantly, make sure that your business gets the correct finance product.”
Brought to you by Preference Capital.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.