SME - a starting point for finance in South Africa

The point of these blogs is to educate. You may not always agree with my thoughts and you are welcome to say so. My thoughts are based upon actual research or practical experience. SMEs have a number of potential sources of finance during the start-up phase. If you are a survivalist, there are the micro loan providers. These providers are normally recognised by their high interest rates. This is high risk business, that is lending to survivalists, so the reward must be high. Hence the high interest rates. Always remember that high risk = high reward applies to everyone. If you were lending to high risk opportunities you would be doing the same. Some will increase the size of the loan, on condition you repaid the previous loan. This serves to encourage you to keep coming back. The more you do business with each other, the more they can build an understanding of how reliable you are, and so they will lend you greater amounts of money. There are also grants and loans from government, but remember that these are never decided upon quickly, and in most cases you will quite likely miss/lose the opportunity long before the finance arrives. However, if this is your only chance then you have to live with this, albeit that is is unfair and counter-productive to what government is attempting to achieve. Then there are the 3Fs. These are generally friends, family and fools. This is not intended to be derogatory, but as stated above, these are high risk lending opportunities which means only fools rush in where angels fear to tread. If one of the three is prepared to lend you money, make sure you tie everything up properly with written contracts to protect all the relevant parties. Otherwise friends can be lost or Xmas dinner becomes a nasty experience. Obviously the cheapest money is your own savings. However, this can limit your options if your savings are limited. Finally, if you do get a loan from the 3Fs or from savings, offer it to the bank as security against an overdraft rather than spending it directly on the business. This helps to establish a credit history for yourself and your business. Also a revolving credit line such as offered by an overdraft allows your money to go a lot further on condition that you are able to generate sales, or in financial terms a flow of cash, quickly.