Data-driven lending is changing SME access to credit. This is the opening statement and topic that Prudence Gcabashe, Product Manager, FNB Cash Advance, presented at the second SME Funding Summit. But she goes beyond this statement; she dives into the comparison between a business and a storybook, and why this is so vital to understand as an entrepreneur.
Acknowledging the SME’s Contribution
“Whatever brought you here today: running a business isn’t easy. You wear different hats. But in spite of the many challenges that SMEs face, they continue to thrive and continue to create jobs,” Gcabashe says. This fact doesn’t escape funders, but knowing business owners need funding support is only one side of the dynamic problem.
When applying for funding, Gcabashe notes that your funding application should read like a story. Lenders should be able to uncover the tale about your business without you being in the room retelling it.
“It’s important to tell a story in a way that can make funders understand. If a funder met your business today, what would they learn about it? Would they learn about your customers, how clean or organised your business is, or about your employees?” she asks.
Reading a Business’s Story
The way a funder gets to read your story is contained in its financial history. “Every payment, deposit and transaction is a part of your business’s story. Updated, consistent and credible information tells lenders who you are, how you trade and what level of finance suits your business.”
Gcabashe notes that the true story of your business should be reflected in your transactional data. Additionally, funders already understand that when SMEs struggle to access funding and opportunities, jobs and growth are constrained. It’s therefore not just a matter of understanding what the statistics are and what these mean.
“Increasingly so, the funding issue is not a funding issue. It’s a growth issue, a job issue, a family issue. And from a funding perspective, it’s increasingly a visibility issue. She explains that this is because funders can only support businesses that they know exist. Businesses whose story is told clearly.
“Every time an entrepreneur hires a new employee, buys from a new supplier or expands into a new market, the impact reaches far beyond the business owner, affecting many families and the economy at large, but this isn’t the story.” The story is the consistent narrative contained in the operational data.
Elements of a Good Story
Just like a good story, your operational data should be able to clearly explain the what, when, where and why of the business as quickly and simply as possible. This creates the setting for your story.
So how do you make your story as clear as possible? Gcabashe explains that there are five key points that the story must contain and that funders will want to hear. These are as follows:
- Cash flow visibility: The business’s performance over time, with clear trading signals.
- Financial records: Disciplined cash flow management that keeps personal and business finances separate to provide accurate financial information.
- Business banking: Depositing income into a business account, not trading invisibly on cash.
- Digital Payments: Payment flows that build a track record for future finance.
- Governance: Compliance with FICA, SARS and CIPC requirements.
These five points all work together to set the scene; it communicates what happens within the context of your business dealings.
Gcabashe explains that through the course of the story, these points should answer a few questions that a business might encounter, such as:
- Who is the person (business) asking for funding?
- Are they trustworthy?
- Can the loan be repaid?
- What will the business do with the funds?
“Your business’s story tells the lender what the answers are. It indicates patterns that show that cash flow can be managed consistently, the business can generate an income, it is either stable or growing, and the records prove this.”
The patterns that the funder reading the data is looking to answer can be categorised as follows:
- Cash flow performance over time
- Quality of financial records
- Compliance, including CIPC registration
- Ability to meet repayment obligations
- Director credit information
Your Story is Action-packed
But a story isn’t just told without some form of action being present; in fact, the entrepreneur is in control of the story. You determine what is said about your business by ensuring all the above criteria are met. This is done through consistent, accurate and reliable record-keeping that shows a business can generate an income and manage cash flow responsibly. These same records indicate where, when and why funds are spent.
Being a registered business (if trading in the formal economy) that complies with the relevant laws and regulations of its industry shows a business owner is a responsible, trustworthy individual. Furthermore, the business is also one that clients can trust and continue to generate an income from.
By managing your cash flow and business in such a way that enables you to take on additional repayment obligations tells a bank or funder that your business can pay them back, and is thus a good investment.
Based on your business story, funders can also understand what type of funding is needed. This is imperative because the right funding instrument for the right business need is the catalyst that drives a story forward.
“Transaction data is a funding enabler,” she highlights. Knowing the need enables the right type of funding.
Some examples of business needs include cash flow gaps, buying stock, acquiring equipment or even expanding.
She encourages entrepreneurs to start with the following steps if the current story your records are showing isn’t the positive one you would like to tell.
- Start by banking your income in a channel that is separate from your personal channel.
- Accept digital payments to start creating a digital footprint.
- Keep records current.
- Build a positive credit profile.
- Own your funding purpose and be clear about what amount will be used for what.
