For most SMEs, access to funding is a business necessity to smooth over fluctuations in cash flow, buy stock or grow the business. But while the first instinct is to jump at any opportunity to secure funding, beware: there are many factors to think about beyond the cash, says alternative lender Merchant Capital.
There has been a sharp increase in reckless lending and over-indebtedness in the SME sector in recent months as the economy struggles to overcome recent hurdles, says Nicole Swart, the executive head at Merchant Capital.
The biggest reason for this is lenders not understanding the needs of the business, and the business owners not understanding the terms of the loan. One example of this is where lenders offer large cash loans where the repayments put a major strain on daily cash flow – the very thing a cash injection is supposed to ease.
“It’s crucial for business owners to critically assess who they do business with. Do your homework: just because it’s easy to apply and obtain funding doesn’t mean its structured correctly for your business,” says Swart. In addition, lenders who provide funding without thorough assessments are practising irresponsible lending, which will only force the business into a cycle of debt.
Responsible lenders work with business owners to understand their requirements, and tailor repayment structures around them. They conduct credit assessments, and examine revenue and operating cost history, to provide an offer that adds value and can be serviced by the business.
The SA SME Finance Association (SASFA) has stepped in to create a code of conduct and guidelines to ensure ethical and sustainable lending structures. Dov Girnun, CEO of Merchant Capital and founding member of SASFA says that a key focus for SASFA is not over-extending business owners, and promoting ‘good debt’ as part of a growth strategy.
“Clients are coming to us to help restructure debt they have taken on from non-SASFA members, where the terms just don’t make sense. The alternative lending space can be a massive benefit to SMEs, but we’re still seeing cash advances where the structure and serviceability was clearly not well understood by the business owner,” says Swart.
Her advice to SMEs is to do their homework: look for online reviews, and check whether the prospective lenders belong to any regulatory group or association like SASFA. “You’re also well within your rights to ask for references, and call previous clients of the lender to assess their experience of working with them,” says Swart.
About Merchant Capital
Merchant Capital was established in 2012 as an alternative provider of working capital, designed initially for Retail SMEs in South Africa. The alternative lender has over the years assisted more than 20,000 SMEs with working capital to the tune of over R4 billion and has expanded its offering to the services industry, including automotive and medical businesses.
Merchant Capital was started in response to the high failure rate among small businesses caused by lack of funding. The company’s vision is to become the leading provider of disruptive financial services products to small and medium businesses in emerging markets.
Because the company was created by entrepreneurs who really understand what running a business is about, Merchant Capital knows small businesses can’t rely on easy access to traditional options. Due to the need for trusty cash flow alternatives, Merchant Capital uses a unique funding and payment model to provide a working capital injection for early stage growing businesses.