SMEs - bank finance

SMEs - finance from a bank. Banks will, and it can vary from bank to bank, offer overdrafts, term loans and asset finance. There are obviously a whole lot more things that banks will do, but these are the normal SME type products most SMEs will look to banks for, or at least they do here in South Africa. Asset finance is intended to purchase items that you will use over a longer period of time than 1 year. So machinery, office furniture, cars and the like. However, with the economy being the way it is right now, they are most likely to fund a vehicle, and least likely to fund furniture. Please note that it does vary from bank to bank and sometimes even between provinces for each bank. As the risk increases so they will ask for larger deposits and shorter repayment periods.Do not be forced into taking a shorter period if your cash flows say no. I saw an article where banks are now talking about a negative trend where businesses are using the full 60 months to repay a car. If it works for you, and your accountant agrees, then try and stick to your guns. Show them your cash flows. Sometimes the older car can be used for more menial task such as deliveries at a later date. The more specialised the asset you wish to purchase, the less likely they will want to finance it. This is once again the risk factor of being able to sell it if you stop paying. So you could possibly get approval on the telephone for a Harley Davidson, but it may well taken 24 months to get approval on a specialised piece of equipment. Sometimes you have to revert to specialised banks or private lenders on these specialised assets. Term loans are not that easy to access, and once again it depends on what you will use the money for and who you are asking. These are often 24 to 36 month loans with a fixed repayment period, but if you are talking to IDC or people like that they will extend the period to 8 years sometimes even more, depending on the transaction. As usual it is not cast in concrete. Overdrafts used to be the easiest finance to access. However, the National Credit Act (NCA)fixed that. While the government denies that the NCA had an impact, there is indisputable evidence that it has. This is another example of the nanny state gone wrong. They tried to protect certain portions of the community from themselves and predatory retailers and financial institutions, and the SME got squashed in the middle. Whereas in the past an overdraft level was a combination of equity and cashflows, with equity playing a big part, today equity plays no part. It is based purely on the cash flows within the business. This means if you want an overdraft to grow, the chances are unlikely you will get one, because your growth capital requirements will require cash flows you intend to build. I may be wrong and there may well be other factors such as BASEL and the like but this is the input I have had from financial institutions. Many SMEs are currently trapped and cannot grow as they cannot raise the necessary working capital for growth.This is good for the lifestyle entrepreneur who does not seek growth, but is a nightmare for the high growth entrepreneur, especially in South Africa where the angel funder and venture capitalist market is still growing.