Believe it or not, funders truly understand that businesses need funding to grow. But they also know that it requires much more than cash flow and capital injections to grow a business – it takes a solid framework within the business to correctly utilise funds. Therefore, their questions aim to discover whether or not a business is sustainable. If not, no amount of money will save it.
Sustainable businesses are enterprises that show they can not only survive over a long period but also turn a profit and grow. This is important because funders want to know that the money they invest in your business will be put to good use and deliver a return for them.
Speaking about the mismatch between SMMEs and funding instruments at the 2026 Funding Summit, Mapula Phathela, Post-investment Associate at IDF Capital, explains that the need to obtain funding can often lead to entrepreneurs taking on the wrong kind of debt.
“The lack of funding readiness stems from MSMEs believing one thing, but the real issue is something else. For instance, an MSME believes that the challenge is access to funding. But the issue might be meeting the criteria for the right type of funding,” she shares. “Ensuring that your business is ready for funding whenever you need it is a continuous job.”
Sustainable Debt Capacity
Phathela explains that when applicants receive a rejection letter from funders, the “no” can be caused by many different reasons.
“Funders are looking at your sustainable debt capacity. They’re trying to see, okay, how much debt do you currently have? Can you take on this new debt that you’re asking for? They look at your repayment ability, right? How stretched are you? They also look at your cash flow stability, because even though on paper you seem like you’re very profitable, cash flow instability can be fatal.”
All these questions aim to answer whether a business is funding-ready or not.
What Determines Funding Readiness?
Phathela notes that there are four pillars to funding readiness.
1. Operational Readiness
“Operational readiness is also very important. Ensure that you have the right systems in place and that you have the right people in place,” she explains. “You must be able to deliver on what you set out to deliver on. You must have the right things in place to be able to grow and to scale.
“Ensure that you have the right people in the right spaces based on their skills and also on their experience,” she advises.
2. Financial Discipline
“Do you understand your numbers? Do you understand what your numbers are saying? Do you understand what affects your revenue and what actually affects your costs?” Phathela adds.
Financial discipline also means both from the company’s perspective and the entrepreneur’s perspective. It means taking care of your credit history and credit score.
3. Reliable Reporting, Budgeting and Visibility
“Ensure that repayments are consistent and that you have working capital control. Ensure that your receipts and your payables speak to each other so you don’t have cash constraints going forward and that the funding that you’re applying for is something that you can actually afford.”
4. Governance and Reporting
“This isn’t just about having a great boardroom. It’s about ensuring that you have the correct structures in place and you’re very transparent in everything that you do,” she highlights
The Difference between Scaling and Growth
According to Phathela, many entrepreneurs conflate scaling with growth.
“Fundamentally, they are two different concepts. Growth is mainly related to an increase in revenue, whereas scaling is an increase in revenue without an increase in costs. I’ve seen a lot of businesses fail because they grew too quickly and couldn’t scale at the right rate. So, ensure you have the right systems and the right people in place to scale and that you understand your business. You must know where your business is right now, where you’re trying to go, and how you’re trying to implement that.”
This understanding of what your business currently looks like, where it is going and how you want to achieve this is the foundation of where you start when assessing what your funding needs are; this prevents entrepreneurs from taking on debt that doesn’t truly meet their needs.
Working Capital Funding
Characteristics: Used for day-to-day operational liquidity and is meant to be a short-term form of debt.
Funding Instruments: Overdrafts; revolving credit facilities
Asset Finance
Characteristics: Used for acquiring equipment and expansion through asset-backed financing
Funding Instruments: Secured debt
Receivables Finance
Characteristics: Used to obtain liquidity through receivables
Funding Instruments: Invoice discounting, debtor factoring
Trade Finance
Characteristics: Supports import or export businesses.
Funding Instruments: Letters of credit, trade loans and supplier financing
Term Loans
Characteristics: Medium-to long-term expansion or general corporate purposes funding
Funding Instruments: Traditional loans
Blended/Alternative Funding
Characteristics: Designed to bridge funding gaps that are left by traditional debt
Funding Instruments: Mezzanine funding, quasi-equity structures
“You don’t want to get short-term funding for a long-term issue. You don’t want to go and get a working capital facility for 12 months to open a branch, right? And maybe that branch will only start making money in 18 or 24 months. Then you won’t be able to keep up with those payments.
“Obviously, that creates pressure with your cash flow instability, your repayment pressure, and working capital strain
Funding Visibility
Echoing the same sentiments as her fellow speakers, Phathela emphasises that entrepreneurs are invisible to funders.
“Some common reasons funding applications fail: it’s mainly because of poor financial visibility. Therefore, entrepreneurs need to ensure that their numbers are reliable. The necessary numbers include management accounts and financial statements.
“Another reason is weak cash flow management. That is extremely important because even though it appears that you have revenue, if you do not have enough cash to keep the business running.”
Other reasons that Pathela cites are:
- Applying too late by allowing your business to land in hot water before turning to funding as the solution.
- Not fixing their governance issues first.
- Unrealistic model assumptions.
- Over-dependence on one source of growth – have multiple clients, for instance.
Funding Takeaways
As Pathela closed the day’s proceedings, she tied the key points together that the day’s speakers pointed out.
Ensuring that you are funding-ready is the first step in accessing funding. To achieve this, entrepreneurs should build businesses that are sustainable, yet financially visible with clear financial reporting and good governance. Lastly, business owners should identify funding partners that meet their needs. Traditional funding through banks is not the only solution, and alternative funding plays a crucial role in filling the gap that banks aren’t able to fill for the SMME that is in a different growth stage than that which the bank requires.
Accessing the right funding for the right need is what makes a sustainable business’s debt journey successful.
