Developing sound financial literacy can unlock funding for your small business

SA is fertile ground for the growth of small and medium-sized enterprises (SMEs). However, obstacles such as the Covid-19 pandemic and July 2021 unrest dealt a harsh blow to these businesses.

Many SMEs were able to access much-needed relief though the financial support offered by those in the public and private sector, but some encountered roadblocks in their attempts as they were either non-compliant or could not interpret or meet mandatory criteria and conditions.

First National Bank (FNB) understands that developing sound financial literacy and management is the key to unlocking business opportunities; it minimises risks and gives a business access to finance and credit, which enables SMEs to grow. 

That’s why the bank has made resources available for entrepreneurs to equip themselves with the necessary tools and knowledge to see their businesses flourish. 

Andiswa Bata, co-head of SME at FNB, says an entrepreneur can easily register a business and get a bank account activated within 24 hours through FNB’s digital platforms. This will allow them to develop a financial footprint, which will enable a financial institution, such as a bank, to assess the health of a business for funding purposes. 

It’s important for entrepreneurs to understand that all lending activities and requirements have to adhere to rules and regulations governing lending in the country. Accordingly, banks also follow and comply with these laws in all their lending activities. 

“A common requirement that puzzled many small businesses during the onset of the hard lockdown was whether they were in good financial standing before the pandemic,” says Bata, unpacking what banks consider when determining a lending decision. 

Some of these considerations are: 

1. Good standing

Banks ask questions such as: How has the business been managing its financial admin? Has the business been keeping up with its normal payments? That means having enough funds to cover your debit orders, not letting debit orders bounce, paying all your accounts on the agreed date and avoiding arrears.  

It’s also important to ensure the business maintains its CIPC-compliance and that any records and submissions are up to date.

Businesses are encouraged to check their credit bureau information regularly and to maintain a healthy personal and business credit record.

2. Liquidity ratio 

This determines whether an SME can efficiently use its assets, including cash, to meet its obligations when they are due. 

3. Profitability 

This considers the extent of profit the business is able to generate from its sales or services, considering operating costs, assets spend and tax, among other factors.

The health of the business’s profit margins indicate its operational efficiency and competitive advantage.

4. Debt capacity 

The first step in determining an SME’s debt capacity is assessing the free cash flow, from the past and the future, available to honour long-term debt.

The second step is assessing any available security or collateral, for example property, or a personal suretyship that can support the business funding application.

Another important consideration is an understanding of the business’s growth prospects, based on the industry and life stage.

Limited growth potential and/or no viable business plan can indicate that any funding would solely be used to fund losses — which typically means the lending appetite is limited.

“This makes it essential for SMEs to understand financial management as well as keep accurate and up-to-date financial records. Fortunately, there are plenty of resources available to SMEs to guide them through this journey such as Fundaba, a business coach, available via the FNB app,” says Bata. 

This article was paid for by FNB.