With the entrance of the global economic crunch and financial crises, bank lending through collateral-based financing has become increasingly difficult for SMEs, whether as existing businesses, in their expansion state or as startups. In fact, startups are a no-go area for bank lending because banks would always argue that they would not risk depositors’ funds on some business yet to be tested. This argument is plausible though. However, existing SMEs have also found it difficult to access bank lending for principally not having the required collateral to support such financing.
With the popularisation of viability lending being carried out by some business finance companies and venture capitalists, SMEs stand a chance to access the required finance for their business. In this case, the lending institutions focus on the viability of the business and the health of the cash flow. Sometimes too, some viability-based lenders ask for lien on certain assets of the business in case the borrower defaults with regard to the loan repayment.
However, there are criteria that SMEs must meet to qualify for this kind of funding. These have been enumerated below in no special order.
One, viability-based lenders are interested in a registered business. This shows seriousness on the part of the owner(s) and at the same time shows that such SMEs are responsible to regulators whether the Corporate Affairs Commissions in filing their returns, the tax authorities and banks. No bank would want to deal with a business the way it deals with an individual. For instance, a bank will offer an SME its corporate banking services rather than its individual banking services for example a current account.
Two, proper documentation is important. This ensures that the business is organised and can be monitored. A situation where sales are done without receipts and invoices and contracts are entered into without any agreements or documentation depicts such an SME as an unserious and dangerous business.
Three, the commitment of the owner and his team to the business is a very important criterion. In fact, one SME finance company rates a business it intends to fund by looking at the commitment of the SME operator/owner. It means this kind of funds is not meant for those who treat this business in a part-time fashion. This is because the lender wants to be sure that the SME owner approaches the business with a “sink or swim” psychology not treat it like a trial-and-error thing.
Four, the SME must put in place measures that promote financial accountability and proper management of resources. The business should have bank statements, statements of accounts and annual audited accounts. This helps the lender to study the business and identify trends, behaviours and performances and to look for areas to correct or firm up when the lender finally decides to go ahead by providing the finance required for the business. Also, through the accounts and financial statements, the lender can assess whether the SME owner manages resources well or is given to spendthrift.
Five, viability of the business and ability to pay back equity or debt or both injected into the business is another important consideration. Viability based lenders are concerned about the viability of the business. They are concerned with the cash flow, the business fundamentals like higher income and returns on the business and lower expenses. They are concerned with whether there is a market for the business, whether existing demand for product or service exceeds existing supply and whether the product/service will enjoy inelastic demand at least for as long as the fund is in place. They also pore over external factors like the effect of government regulations, response of the competition and the need for the product/service in the SME’s preferred market as a basis to determine their decision to fund or not to fund.
Six, the existence of good corporate governance in the business is also important to viability based lenders. Where the owner is the accountant, sales man, cashier, HR manager and all that gives away the business as an autocracy. This is not to say that the business may not employ lean staff measures. However, structures have to be put in place to show that the owner of the business is himself/herself responsible to the business system in place.
Seven, the existence of a business plan will further accelerate the process of business assessment by a viability based lender. In this case, when the SME owner/operator has made his/her presentation, the lender needs to have a document to pore over to determine the viability of the business. The onus is on the SME owner to prepare a business plan or outsource that job to a consultant who prepares a comprehensive and financeable business plan that would be useful to both the SME owner and the lender in facilitating the release of the funds and in running the business.
Eight, the management ability and competence of the SME will also be considered because if the existing manpower does not have the requisite skills and training to manage the expansion stage of the business, it might jeopardise the success of the whole funding effort. The lender may suggest the employment of competent hands to correct this.
Lastly, ability of the SME to share the business interest, profit and control of the business is another consideration. Any SME seeking external funding must be prepared to accommodate proposals to sell off a certain portion of equity or interest in the business to the incoming investor. But I’ll advise that this stage requires sensitive management of affairs by a consultant, an investment banker or professional to help the SME navigate this stage successfully and profitably. All these are important criteria that an SME ought to meet to access viability based finance.
With the entrance of the global economic crunch and financial crises, bank lending through collateral-based financing has become increasingly difficult for SMEs, whether as existing businesses, in their expansion state or as startups. In fact, startups are a no-go area for bank lending because banks would always argue that they would not risk depositors’ funds on some business yet to be tested. This argument is plausible though. However, existing SMEs have also found it difficult to access bank lending for principally not having the required collateral to support such financing.
With the popularisation of viability lending being carried out by some business finance companies and venture capitalists, SMEs stand a chance to access the required finance for their business. In this case, the lending institutions focus on the viability of the business and the health of the cash flow. Sometimes too, some viability-based lenders ask for lien on certain assets of the business in case the borrower defaults with regard to the loan repayment.
However, there are criteria that SMEs must meet to qualify for this kind of funding. These have been enumerated below in no special order.
One, viability-based lenders are interested in a registered business. This shows seriousness on the part of the owner(s) and at the same time shows that such SMEs are responsible to regulators whether the Corporate Affairs Commissions in filing their returns, the tax authorities and banks. No bank would want to deal with a business the way it deals with an individual. For instance, a bank will offer an SME its corporate banking services rather than its individual banking services for example a current account.
Two, proper documentation is important. This ensures that the business is organised and can be monitored. A situation where sales are done without receipts and invoices and contracts are entered into without any agreements or documentation depicts such an SME as an unserious and dangerous business.
Three, the commitment of the owner and his team to the business is a very important criterion. In fact, one SME finance company rates a business it intends to fund by looking at the commitment of the SME operator/owner. It means this kind of funds is not meant for those who treat this business in a part-time fashion. This is because the lender wants to be sure that the SME owner approaches the business with a “sink or swim” psychology not treat it like a trial-and-error thing.
Four, the SME must put in place measures that promote financial accountability and proper management of resources. The business should have bank statements, statements of accounts and annual audited accounts. This helps the lender to study the business and identify trends, behaviours and performances and to look for areas to correct or firm up when the lender finally decides to go ahead by providing the finance required for the business. Also, through the accounts and financial statements, the lender can assess whether the SME owner manages resources well or is given to spendthrift.
Five, viability of the business and ability to pay back equity or debt or both injected into the business is another important consideration. Viability based lenders are concerned about the viability of the business. They are concerned with the cash flow, the business fundamentals like higher income and returns on the business and lower expenses. They are concerned with whether there is a market for the business, whether existing demand for product or service exceeds existing supply and whether the product/service will enjoy inelastic demand at least for as long as the fund is in place. They also pore over external factors like the effect of government regulations, response of the competition and the need for the product/service in the SME’s preferred market as a basis to determine their decision to fund or not to fund.
Six, the existence of good corporate governance in the business is also important to viability based lenders. Where the owner is the accountant, sales man, cashier, HR manager and all that gives away the business as an autocracy. This is not to say that the business may not employ lean staff measures. However, structures have to be put in place to show that the owner of the business is himself/herself responsible to the business system in place.
Seven, the existence of a business plan will further accelerate the process of business assessment by a viability based lender. In this case, when the SME owner/operator has made his/her presentation, the lender needs to have a document to pore over to determine the viability of the business. The onus is on the SME owner to prepare a business plan or outsource that job to a consultant who prepares a comprehensive and financeable business plan that would be useful to both the SME owner and the lender in facilitating the release of the funds and in running the business.
Eight, the management ability and competence of the SME will also be considered because if the existing manpower does not have the requisite skills and training to manage the expansion stage of the business, it might jeopardise the success of the whole funding effort. The lender may suggest the employment of competent hands to correct this.
Lastly, ability of the SME to share the business interest, profit and control of the business is another consideration. Any SME seeking external funding must be prepared to accommodate proposals to sell off a certain portion of equity or interest in the business to the incoming investor. But I’ll advise that this stage requires sensitive management of affairs by a consultant, an investment banker or professional to help the SME navigate this stage successfully and profitably. All these are important criteria that an SME ought to meet to access viability based finance.
