Given that access to finance is one of the biggest stumbling blocks for tourism businesses, Tessa Reed talks to banks about what they look for before backing a project.
Access to funding has been identified as one of the challenges faces by SMMEs. Mark Rose, Head of New Business Development for Business Banking at Nedbank, says: “According to the recently launched Nedbank Small Business Index (NSBI), many SMEs believe they cannot access finance, which may be based on perception or previous experience.” He adds that many entrepreneurs also access finance from non-traditional sources of business funding, such as family members, friends and personal savings.
So how do businesses go about getting banks to finance their projects?
The importance of a business plan cannot be underestimated when it comes to getting a bank to back a project, whether it’s a new business venture or the expansion of an existing business. “A business plan gets a business off to a good start,” says Ethel Nyembe, Head of Small Enterprise at Standard Bank. “Examining every aspect of your business will help you identify problems, work your way around them and realistically plan your future.”
Nyembe adds that, along with a potential lender’s credit record, the business plan is a key component that banks examine before granting a loan. “The more comprehensive your plan is, the better your chances are of getting the start-up finance you need,” she says, adding that the plan can also act as a blueprint that can be referred to and consulted to help keep the business on track.
Rose says Nedbank looks for a sound business plan as one of the key components when it comes to considering whether or not to provide finance. According to him, a business plan should include a formal statement of business goals; the reasons they are believed to be attainable; and the plan for reaching those goals. Yudhvir Seetharam, Head of Analytics at FNB Business, says a well-thought-out business plan explains or tells a company's story, including its organisational, financial and market-related details. “The business idea must be viable and the entrepreneurs must fully understand the market and industry in which they operate.”
Key elements that should be included in a business plan, according to Rose, are background on the business opportunity; key activities; its value proposition; key resources; market studies, including a SWOT analysis (strengths, weaknesses, opportunities and threats); marketing and sales strategy; balance sheet; income statement; cash flow analysis and an exit strategy.
Both Seetharam and Nyembe also underscore the need to conduct market research. “Conducting market research will help determine issues such as the potential size of your target market, pricing and what your competitors are doing,” says Seetharam.
“Knowing in advance how many people with similar skills are working in the community will help you be competitive,” says Nyembe. She says other elements to include in a business plan are the pricing, method of marketing, initial investment needed, the required tools of the trade and a financial cost analysis, including insurance needs, which are often overlooked. She adds that businesses should identify the quiet periods for their business and look at how they will plan finances around these periods.
According to Rose, the business case presented gives the bank insight into the plans of the business. “Some of the insights we gain include the viability of the location, knowledge and industry experience of the owner and the ability of the business to repay debt.” The ability to repay a loan is key to a successful application. “The entrepreneurs should meet the requirements of the bank’s credit process and the business should have the ability to generate enough revenue in order to be able to meet loan payment obligations,” says Seetharam.
In addition to a sound business plan, finance applicants need to demonstrate their commitment to their own project.
According to Nyembe, Standard Bank looks for the four ‘Cs’ – collateral: the assets that are surety for the loan; capacity of the business to furnish the loan payments; capital: how much your business is worth in rand terms; and character. The final point relates to the entrepreneur and includes their personal records, behaviours and attitudes. “You need to show a good record of repaying debt, a good record in the industry in which you operate,” she says, adding that the bank also looks at how committed a person is to their business in terms of the time and money they have invested as well as how much business management capability they have.
Rose says that owning a business is a life-changing experience. He says Nedbank urges aspirant entrepreneurs to ask the following difficult questions: Is your business concept really for you? Do you understand the market and its nuances? Do you have the necessary capital to inject? Are you willing to risk or sacrifice your current lifestyle to invest in your business idea? and will you cope with working long hours, no holidays for a prolonged period and most probably working on weekends?
Seetharam also suggests some questions entrepreneurs should ask themselves: What does the competitor landscape look like? How does your profit margin (or any other financial measure) compare with the industry? Are there substitute products instead of yours? Is the location appropriate? Have you priced your products or services appropriately? and are there any special regulatory requirements in your business/industry?
