Just 7% of SME owners in South Africa have never looked for funding. This is according to the SME Landscape Report released by SME South Africa. This indicates a very high prevalence of ‘funding seekers’ within the SME sector.
If you have been turned down for funding and want to know why – Jeremy Lang, Regional General Manager of Business Partners, a SME funder, answers all your frequently asked questions about your rejected application.
What are some of the biggest reasons entrepreneurs get turned down for financing in South Africa?
The top reasons SMEs are refused financing:
• Insufficient profitable operating history
• Inadequate cash flow generation
• Limited collateral
• A bad credit score
• Gearing levels/ ratio (amount of debt vs equity) too high
What red flags are funders looking for in a business?
Funders should generally take a positive approach to finding reasons why funding should be granted, rather than not. However, sometimes the due diligence process does reveal red flags which cannot be ignored, as it does increase the overall level of risk associated with the applicant.
Some examples of these are:
• A checkered credit record.
• Inconsistency in information provided.
• Inaccurate or outdated annual financial statements and management accounts provided.
• Inability of applicants to provide substantiating information.
• Lack of technical skills and/or business acumen by the entrepreneur.
• Unreasonable or unsubstantiated projections or budgets.
The trick is to identify which funder best suits your needs
What kind of businesses and business owners do funders like investing in?
The funding landscape for business owners in South Africa is vast and often complex. Different funders have different investment mandates which prescribe the investment criteria, such as:
• Minimum and maximum funding amounts
• Industry preferences
• The level of risk the funder is willing to accept
• Minimum and maximum periods that the funding may be granted for
• Cost of finance
• Funding instruments that can be used i.e. debt, equity or quasi equity instruments
• Funding at different stages of the lifecycle of a business
The trick is to identify which funder best suits your needs, in terms of the criteria above, and then to approach these funders to improve your chances of success in securing funding.
The risk appetite of the funder may also vary, with some industries being more attractive than others and some more risky, based on micro and macro-economic conditions.
However, funders do want to see:
• Committed business owners, both financially and through their level of involvement in the business.
• Business owners who understand their business from a technical perspective and have good levels of business acumen.
• Business owners who run their business with integrity and transparency.
• Business owners who clearly illustrate a passion for the business and industry.
• A business owner who understands their customer and market segment well.
• A business that employs good sustainability practices by adding real economic value, while having a positive impact on society and the environment.
• A good profitable track record for established businesses.
Any entrepreneur who has applied for finance and has been unsuccessful has the right to inquire with the institution representatives the reason/s as to why their application for funding was declined
How can entrepreneurs get more feedback on why their application was unsuccessful?
Any entrepreneur who has applied for finance and has been unsuccessful has the right to inquire with the institution representatives the reason/s as to why their application for funding was declined.
The important part is to listen closely to the reasons given and consider whether there are ways to overcome these.
- See also: COVID-19 Cash Flow Guide
What are some of the ways entrepreneurs can up their chances of success?
Do research on the funders who most closely match your funding needs, based on their investment mandate and criteria.
Prepare your application pack to ensure your funding application is aligned with the type of funding opportunities the funders are looking for. For example, do not hard sell development impact to a funder who is seeking mainly commercial returns, and vice versa.
Ensure your business plan, financial statements, projections and other supporting documentation are properly researched, reasonable, relevant and accurate.