Small, medium and micro enterprises (SMMEs) tend to feel that 'banks don't deliver when we need it', but they often overlook the importance of proper financial management and effective banking, say local banks and business consultants.
Mwendabai Kalaluka, managing consultant at Intellogic Africa Business Consulting and Accountants, says SMMEs often treat banking as an afterthought. Finances are poorly managed and bookkeeping is done using a 'receipts in a box' system.
"Many are not financially astute, or they are too busy putting food on the table to keep their accounts up to date," he says.
What they do not realise, he says, is that through proper financial management, they can put themselves in a better position to secure financing when they need it. All businesses require financing, Kalaluka says. Without access to financing, SMMEs often find themselves unable to deliver on potentially lucrative contracts, or even to pay wages and operating expenses.
Thommie Burger, head of SME business consultancy JTB Consulting, is currently completing a PhD in entrepreneurship, and says that in his experience, access to finance is one of the biggest challenges SMMEs face. Second to that is their failure to manage their finances effectively.
"Among start-ups, we see a failure rate of up to 75% in the first two or three years, and most of these failures are due to a lack of financial knowledge," he says.
Burger says from every ten start-ups who consult his practice, four or five have viable business plans, but as many as eight do not have financial literacy or business skills. Lack of finance may also hamper their ability to grow.
"They cannot service more clients due to a lack of working capital. Banks market solutions for SMMEs, but often you will find that because the SMME has no credit history, they get turned away when they apply for financing. Only around 15% of our clients get approved for finance. Many use their savings, provident funds or family loans for finance, or their own property as collateral. But mixing personal and business finances is not advisable," he says.
Kalaluka echoes this sentiment. Personal and business banking should not overlap, and all business revenue should flow through a business bank account, he says. This allows businesses to benefit from the banks' SME product suites; it enables effective record-keeping to build a financial history.
"It's common for cash-driven businesses to use that cash for expenses, and never deposit it in the bank. But the primary source of financials is the bank statement, so by not depositing all revenue in the bank account, they may be disadvantaged when they seek funding because their statements do not reflect all their income. In addition, by paying cash they may be losing tax benefits."
But most SMME owners feel they have no choice but to turn to their personal overdraft facilities or credit cards when they need ready funds. One such business owner, Ian Goss-Ross of contact centre specialists Elingo, recalls his business launch in 2000: "It wasn't easy finding start-up finance. I used my savings, downscaled my house and had to sell my Land Cruiser. The team of four worked from my home for the first two years."
Goss-Ross had technical, financial and business management expertise to draw on, and his business has now grown into a highly successful entity. But getting to a point where he felt truly confident that the business would be successful took around four years.
Better banking generates financing
Banks and business consultants say start-up and bridging finance is available for SMMEs.
Oscar Siziba, Absa's head of enterprise business in retail and business markets, says: "There is a lot of funding available to SMMEs from banks, government, venture capitalists and development agencies. The issue is not so much the availability of funding, but more the quality of applications we all receive. Entrepreneurs need to ensure that they have a good business plan in place and need to demonstrate a good understanding of their business."
Sanjeev Orie, FNB head of products and projects, business banking, advises: "Generally, businesses should watch and manage their cash flows, especially payments to suppliers, to ensure that they do not find themselves in situations where they have adverse credit records. This is the single major reason why scoring for a facility may be thwarted. Additional documents that detail the business case, the financial statements as well as forecasts of sales and future performance will also help to motivate for securing a credit facility."
Banking value adds
The small business sector is a big focus for banks. Orie says: "This is an incredibly important focus area for business banking, so a number of our solutions and value-adds are geared to this segment.
"Almost 70% of start-ups use a personal bank account when starting the business, and then, as the business grows, the need for a business account becomes more apparent. We offer a seamless and automated process to switch from a personal account, providing a credit application process where even new start-ups can qualify for a facility immediately after opening an account; and to ease administrative overheads we have created processes to simplify the compliance process."
FNB also offers a Savings Pocket to help businesses set aside funds for emergencies, inContact Pro to track cash flow and eBucks for Business, as well as BizNetwork events to provide start-ups with advice and training interventions.
Absa's Oscar Siziba says SMMEs are a key driver of Absa's growth strategy, making up between 75% and 85% of its new business banking clients.
"The typical SMME is transaction outcome-based, characterised by low value but high volume business. They tend to have simple banking needs but require more support from their bank. Absa's key products and services to this market include Working Capital Solutions to help SMMEs to deliver on large contracts and Cash Management Solutions.
"We see a growing demand for additional support services over and above traditional banking," he says. "We have added products like Business Essentials, to help businesses manage their cash flows and employ proper governance. It also includes over 2 200 training courses to help them upskill themselves."
Absa has also established a procurement portal and Enterprise Development Centres around the country to provide entrepreneurs with support and mentorship.
Sibongiseni Ngundze, managing executive of Nedbank retail relationship banking, says Nedbank plays a significant role in supporting and partnering with SMEs through its Banking and Beyond philosophy. One of its innovations is the new Nedbank PocketPOS. It is the first live Europay Mastercard, Visa (EMV) certified mobile point of sale solution in South Africa, which enables businesses to process debit and credit card transactions using a smartphone connected to a secure card reader.
Nedbank also runs Small Business Friday in association with the National Small Business Chamber which provides free small business seminars, and sponsors the "It's MyBiz" reality TV show on e.tv.
Nedbank also partners with the national department of public works to support the Vuka Mentorship Programme for entrepreneurs as well as various incubator programmes. Over the past four years, Nedbank has invested over R25-million in enterprise development assistance to black SMEs, benefiting over 2 500 entrepreneurs.
"The Nedbank Small Business Seminars have trained over 30 000 small business owners since inception in 2003," says Ngundze.
Kalaluka believes all South Africa's major banks offer similar solutions for SMEs, although each may structure them slightly differently. Whatever bank businesses choose to use, they should channel all revenue through the business account and maintain disciplined financial management to benefit in the long run.
Avoid excessive use of a company debit card — use a company credit card instead, says Chartered Accountant Mwendabai Kalaluka.
Credit cards often have a set monthly fee, while debit card transactions are billed per transaction.
Avoid using petty cash — or any cash — wherever possible. By channelling all revenue through the bank and using cards and electronic transactions, a more complete income and expenditure record is kept, Kalaluka says.
Carefully manage cash flows, especially payments to suppliers, to maintain a good credit record, says FNB. Avoid blurring the line between personal and business banking, advises business consultant Thommie Burger.
Use a reputable small business accounting package to manage accounts, payroll and compliance. Free and subscription-based cloud solutions are also available.
Make use of bank value-added services, such as accounting solutions and business development and training events. A business cannot consider itself comfortable until it has a buffer fund of 6 – 12 months' operating expenses set aside, says Burger.
In a previous version of this story, we incorrectly referred to Oscar Siziba as Nedbank's head of enterprise business in retail and business markets. Oscar Siziba is, in fact, Absa's head of enterprise business in retail and business banking. We apologise for the error.
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