In general, Small and Medium Enterprises (SMEs) in Zambia cite access to finance as the main constraint they face. However, what most SMEs do not realise is that financial institutions and use other people’s money to invest at a profit. For this to happen, SMES must present feasible and innovative proposals with realistic prospect to deliver good profit. A business is only able to pay back a loan if the funded project generates adequate cash flow and profit. In the case of donor-funded challenge funds, the application process is very competitive to ensure the best SMEs emerge as winners. Invariably, successful applicants are required to provide match funding (usually up to 50% of total project cost). This is to ensure the beneficiary has their skin in the game and committed to the business’ success. Funders are not charity organisations and will not throw money into a project not backed by a compelling and viable business plan.
This article is a follow up to ‘Tips on good business practices for SMEs’. It continues to share a few ideas on how to get your business investment ready and attract the much-needed funding to consolidate operations and accelerate growth. Three business success factors are discussed below.
- Build a track record
Any market that a business operates in is competitive and businesses that have been there longer are looking to expand and at the same time, new entrants are looking to enter the space. Most funders will be more open to financing a business that has been operational for two to three years in comparison to one that is just starting because the risk is lower for the business that has gone through the waves and survived. Good financial projections are not enough to get funding because rarely do things go as planned in business. It is always easier to start a business using one’s own savings and/or funds borrowed from friends and family members because they are more likely to believe in you and your idea than a stranger. It is important for an entrepreneur to show their commitment to their idea and put in all the effort to see it take off. This entails having a well-defined market for their product/service and clear operational procedures that any professionally run business is expected to have.
- Evaluate all funding options
Once you have built a solid record of your business, (i.e you have a clear target market and identified your differentiation factor, identified the main risks and mitigation strategies, have properly compiled financial statements and established procedures of your business), you can begin to look at funding options to take your business to the next level. Funding options may range from bank finance, donor funding or equity among others. Depending on the sector you operate in, different funding options would be available. When borrowing, it is important to match short term assets with short term funding and vice versa, and evaluate the cost of borrowing before you settle on a particular funding option. For example, with bank funding, you may consider working capital finance (overdrafts, invoice discounting, debtor or stock finance) for short term funding; or long term funding options such as a business term loan, commercial property finance and asset finance for fixed assets. This leaves room for you to tap into the right finance product when the need arises.
Although others may shy away from equity funding because they want to go in alone and remain in total control, equity funding is a cheap way to grow the business. The main advantages include market linkages and experience that the equity investor may bring into the business. There are many venture capital firms and impact investors that are willing and able to fund great business ideas by buying a stake in the business and getting involved in the day to day management of the business. Quite often, the business benefits immensely from the networks, experience and expertise that equity investors bring to the table.
- Remain competitive by adding value to your customers
Some businesses tend to become relaxed and take things for granted once they have built a good customer base. Remember, other businesses are always checking out their competition and looking at how they can tap into your customer base. To remain ahead of the curve and keep your customer base, ensure you do not compromise on quality and continue adding value to your customers to keep them committed to you. Especially in this digital age, technology has killed some businesses and propelled others to the next level, a business should always look at how they can deliver products/services in a better, faster and cheaper way to its customers. At the end of the day, what customers look for is value for their hard-earned money.
By Mwandizhya Daka, Portfolio Manager.