Friday, October 30, 2009

Business Finance in Difficult Times

Although many small firms have been experiencing difficulties in the current economic climate, both with trade and accessing
business finance  , many smaller businesses are booming. So what does the future hold for small businesses in South Africa?

Both entrepreneurs and small business experts have said that we are through the worst, while other believe it may be that a W shaped, basically a short but unsustainable recovery. Trading conditions may continue to be challenging. Business finance from risk-averse lenders may continue to be an issue and as the case currently, Angel finance together with other types of funding may be the only option available to business looking to start or grow.

Given that small business account for 60% of all businesses in the South Africa, it will be this sector which will help lead the country out of recession. But is the SME sector currently in a fit enough state to effectively kick-start the economy? Many SMEs outside the financial, property and transportation sectors have not felt the same pain as larger businesses. Many continue to have good orders, profitable work and, if finances were pre-arranged before the clampdown by the banks, many have little difficulty in continuing financial arrangements.

The outlook is difficult but workable. Strangely, where the greatest challenge to SMEs lies is when the economy begins to recover.
The climb out of recession is the time when the greatest number of businesses fail. Those failures are not caused by poor sales or losses – many of those businesses that fail are profitable and expanding.
Rather, the reason is simple: a growing business needs increased working capital – it needs cold, hard cash. Cash to fund the next sale, cash to fund the next increase in turnover.

A lack of working capital can lead to over-trading. Despite increased turnover and profits a business may not generate enough cash to cover its daily needs. It’s a risk all companies face. If a business has a conflict between profitability and cash flow, it must choose cash flow every time.

Being a profitable growing company also means a business has greater need for finance. As turnover grows, so stock grows along with the money owed to suppliers, tying up increasing amounts of cash in these areas.
So where can businesses get the finance they need to survive the upturn?
Banks are being tougher on businesses – reviews are more common, renewals tougher and banks are demanding increased security or other guarantees, suggesting shorter repayment terms or alternative finance options.

Banks want more information, projections and plans and on a more regular basis. If they don’t like what they see, or don’t see what they expect, they are increasingly likely to withdraw facilities. Despite that, the South African banking figures show that bank lending to non-financial businesses increasing by R100 million in May, but that was after the slump in April of R2.3 billion.

Business finance is out there. Businesses needing extra capital can look to peer groups or to venture capital. This venture capital comes from two major sources – either business angels or Venture Capital funds.
These individuals or funds put up money for shares – and they risk losing the money if the project fails. Demand for funding is increasing and there is less money available, but people still want good businesses to invest in.

Given the current recession, what do small businesses need to think about, and what should they do differently?

The simple answer is that nothing should be fundamentally different – the basics always apply in good and bad times: you need to be providing the products or services that customers want. Look at those organisations that managed to thrive despite the economic slow down. When times are tough you need to be selling the product or service that customers think of first when there is a specific need. Solid client relationships are also key. The relationships you have with your clients will help them to not only trust your product or service but also refer you to their friends and colleagues. Last but not least, ongoing market research to understand the needs and situations of your clients are essential. The better you understand your customers, the better you can provide them with the product or service that they require, at the price they are willing to pay.

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Friday, October 16, 2009

Google Profit Means Recovery May Be Near?

With the news today that Google has made record profits of $1.6 Billion for the last quarter, the good news is that it may be due to the fact that those advertising on the search engine is seeing light at the end of the tunnel.

For many small businesses Google remains the most effective advertising channel through its pay per click strategy where businesses only pay for the visits they receive from potential clients searching for something on specific. Mainstream advertising can be extremely expensive and often buying what small business owners can afford. But Google has revolutionized the way we look at advertising.

With many of the businesses we have started, advertising on Google has been a key contributor to the success we have experienced and moving forward this will keep on being the case. Press advertising is not only expensive but often difficult to measure in terms of results. Visits from potential clients to websites such as SA Business Plans and the Investors Network has soared and this is solely due to the increasing customer confidence in the future.

With the recent profits announced its clear that businesses are increasing their ad spend and web visitors, being the real power behind the increased inflow of profit is importantly clicking on ads and hence on the look out for products and services to purchase.

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Thursday, October 08, 2009

Getting Finance for Growing a Business

Corry and Jaco Coetzee started their small business four years ago. They decided on a goods supplier to the local community as there was a clear gap in the market at the time and they wanted to have flexible working hours. Recently they decided to grow the business further and have now secured R5 250,000 in funding to expand. Here Corry shares her top tips for getting business investors on board.

Update your business plan
A clear business plan is essential. If you acquired funding for your business when you started up you will probably already have a business plan. Now is the time to update the plan to reflect your business and its needs as it is today. Without one people aren’t even going to look at you. You need to make sure you have done your research properly so when you get grilled you aren’t going to loose people’s confidence. It doesn’t have to be long, it just has to contain the key factors.

Consider business angels
Business angels invest capital in new businesses and can also give a huge amount of advice. We were introduced to ours through an angel network called Investors Network and secured R2 000,000. At the beginning we didn’t feel worthy of their help, but it’s amazing how many people are prepared to give advice and invest their money in your business.

Be realistic about how much ownership in the business you want to give away
If it’s too low you’re not going to win confidence in your investors. Obviously you want to give away as little of your business as possible so decide the maximum and the minimum first and stay within that.

Get a good business manager
It’s important to have a good business manager at your bank to get advice from. After building up a relationship with ours we managed to secure R2 500,000 with the help of a local business loan guarantee scheme. The very fact the bank was prepared to give us this amount of money meant other investors had more confidence in us.

Be resilient
You are going to get knocked back lots of times. It’s not a quick process. We emailed a lot of people, and I think it paid off to keep revising the proposal to make it look more professional until it got somewhere.

Get an accountant on board
Be sure to get professional advice, even if this means spending money. No matter how excited you are about your business, the investors are going to be even more concerned because it’s their money at stake.

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Thursday, October 01, 2009

Few things as exciting as starting a business

Amongst all the exiting developments, projects and business deals from last year, one of the highlights for me was the successful start up of a community for entrepreneurs and investors where business ideas get funded. Together with my business partner, we have long dreamt of contributing to business funding to support entrepreneurs in South Africa. Finally we were able to launch Investors Network and today the business is going from strength to strength. During the process of doing this though, I realised just how much I love setting something up.

Amongst the many experiences I recall from setting up the business, what really stands out for me is the realization of the challenges that entrepreneurs face when starting a business in South Africa. The difficulties with telecommunication, the struggle with the banks, the many bits of paper work and the fact that almost everything takes much longer than first anticipated. But most of all the day we first opened the doors is what stands out most. Few things in the business world beats that feeling.

Starting a business is one of the best feelings you can experience (along with jumping out of an aeroplane – but that is for another day!) You realise that entrepreneurs don’t do these things just for money but for the sheer thrill. I have met many would be entrepreneurs seeking investment from me in the last few years. I do get turned off immediately if I suspect the only desire driving the team is money. It simply is not enough to keep you going.

I also remembered a quote from an entrepreneur that I had worked with on a project a few years ago. She said that you do not have a business until you have a customer. The events of last week brought that to life for me. Many of us come up with great business ideas and some of us may do something with this idea (like form a company) but very few take the critical step of turning that idea into a business. That is truly the scary bit – but it is about emotions rather than money.

Investors will not invest in a business that cannot prove strong customer demand. Sometimes all you need is a letter of intent or pre-orders and you have transformed your idea into a business.

My advice in this blog is to all of those of you who have a great idea but have not done something with it….

Go for it – make it happen. I promise you that even if you crash and burn – the thrill of having gone for it will give you a smile that will last for eternity. To misquote Dickens “Better to have loved and failed, than not to have loved at all”

All the best, and as always, I am happy to help

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