Saturday, 3 March 2018

SMEs financing: turning from the traditional norms

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Adnan Adams Mohammed

SME finance is the funding of small and medium-sized enterprises, and represents a major function of the general business finance market – in which capital for different types of firms are supplied, acquired, and costed or priced.
The traditional capital source is supplied through the business finance market in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate bond issues; venture capital or private equity; asset-based finance such as factoring and invoice discounting, and government funding in the form of grants or loans.

However, not all business finance is external/commercially supplied through the market. Much finance is internally generated by businesses out of their own earnings and/or supplied informally as trade credit, that is, delays in paying for purchases of goods and services.
The centrality of SMEs to the economic development of developing countries, especially, has been well established.
In Ghana and most parts of the world, SMEs account for the vast majority of jobs and more of such businesses would be required to absorb the growing workforce and address unemployment on the continent.
This requires an enabling environment for SMEs to thrive and contribute to economic development. One of the major constraints facing SMEs especially startups is the mobilization of the requisite funds to serve as initial capital for the commencement of the business.

In Ghana, the ordinary and viable option for startup businesses is the resort to bank loans for initial capital. For startups, this option is usually a longshot not only because they may not have the requisite documentation to access the loans, but also the process could be arduous.
According to Alhassan Andani, CEO of Stanbic Bank Ghana, startup businesses have hurdles they have to overcome to achieve success in their businesses and one major hurdle is finding ways to raise funds to support businesses.

“The financial world has a wide spectrum of actors with distinct roles and responsibilities. There are firms who are into venture capital capital, commercial banking, equity investors and businesses advisory services, so as an SME with a unique idea at the formative stage, it is important to know the right places to source for funding. Fortunately, there are new innovative ways to raise funds to start your business”

Mr. Andani noted that new business owners are now gravitating towards the new age fund raising methods, which help them set-up their businesses and once they gain traction and start making profit they make use of the traditional methods to grow and expand their businesses.

Meanwhile, Dr Pascal, a lecturer at GIMPA during the Young African Leaders Initiative (YALI) training sessions on entrepreneurship development profiled alternative sources of funds that SMEs and startups can explore to support their businesses.

Alternative sources

Crowd funding; be they family, friends or strangers, if people believe in your business idea and believe it has the potential to be successful, they will invest in it. Crowdfunding entails having a large number of people “donate” to your business idea without requiring you to pay them back, as such, it has democratised access to finance by lowering the barriers to financing opportunities for not only entrepreneurs, but also charities and creatives. Crowdfunding is a good alternative to fund a venture without giving up equity or accumulating debt. So, choose the crowdfunding platform of your choice, share your business goals and raise funds.

Bootstrapping; bootstrapping is also a good way to fund your business because it entails you founding or building your company from personal finances or from the operating revenues of the new company. It is also an effective and inexpensive way to ensure a business' positive cash flow. It’s the best way to keep company’s mandate 100% your own, without outside interference because you’re not borrowing or selling equity or a stake in your business. Friends and family are valuable in this instance; however, your life savings could come in handy if neither option is available. Bootstrapping is also a great way to get around the early challenges of ‘no confidence’ from banks, investors and other traditional sources of capital.

Factoring; it is a finance method where a company sells its receivables at a discount to get cash up-front. However, factoring should be the last option as it can cause substantial amount of immediate debt. It is most commonly considered by those with limited funding, and are strapped for cash. Seeing as the business is selling its receivables at a discount to obtain immediate cash, it can be dangerous and should rarely be used.

Angel investors; they are typically wealthy people who provide start-up capital for a business in exchange for convertible debt or ownership equity; however they are generally more private and harder to find because they don’t want to be inundated by deal flows. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages. Angel investors are focused on helping start-ups take their first steps, rather than the possible profit they may get from the business which is why they are ideal for aspiring entrepreneurs.

Government Funding; the Government of Ghana, for example, introduced the National Entrepreneurship and Innovation Plan as a primary vehicle for providing an integrated national support for startups and small businesses. However, government loans and grants are usually subject to key deliverables such as job creation, women empowerment, and youth and economic development being met. With affordable repayment options they are the best option for entrepreneurs who are working with very little.

Bank finance; this when you have a good credit record and capital (raised from bootstrapping, crowdfunding, angel investors, etc.), it can open up financing from the bank. You need to be able to prove to the bank that your business idea is viable and that you have a client base anticipating the launch of your product or service. Cash and fixed assets are a great way to show that you have security and increase your chances of being approved for a business loan. “The way in which people do business is evolving, this also means the way people start their businesses is changing, and there is no right or wrong way to do it. Get creative when you need to fund your business, there are many options you can consider. Cash has rarely stopped a focused entrepreneur from achieving their dream so don’t let it stop you,” Mr. Andani concluded.

Effective management of lending to SMEs and startups

Apparently, most of the time, the other challenge faced by startups and SMEs is the ability to manage the monies raised. Most of these monies end up not yielding intended results, therefore, financial analysts have agreed that an effective management of business lending knowledge is critical for success, despite availability of funds.
The effective management of lending to SMEs and startups can contribute significantly to the overall growth and profitability of banks, Mr Andani has said.

There has been considerable research and analysis into the methods by which banks assess and monitor business loans, manage business financing risks, and price their products – and how these methods might be further developed and improved.

There has been particularly intensive scrutiny of the kinds of business financial information that banks use in making lending decisions, and how reliable that information actually is.

Banks have traditionally relied on a combination of documentary sources of information, interviews and visits, and the personal knowledge and expertise of managers in assessing and monitoring business loans. However, when assessing comparatively small and straightforward business credit applications, banks may largely rely on standardized credit scoring techniques (quantifying such things as the characteristics, assets, and cash flows of businesses/owners). Using such techniques – and also centralizing or rationalizing business-banking operations generally – can significantly reduce processing costs. Standardized computer-based assessment may also be more accurate and fairer than reliance on the personal judgments of local bank managers. As a result, banks may now be able to offer more loans, faster and in larger amounts, and reduce previously high security requirements.

Business lending as a whole is substantially more diverse and complex than personal and residential mortgage lending. This, coupled with the large size and inherently risky nature of many business loans, tend to limit the scope and desirability of computerized credit scoring in assessment and monitoring.

Reports of most surveys and monitoring of SMEs

From a number surveys, it is evident that small firms have very weak financial position; they rely on credit facility to finance their operation and this credit facility most times comes from accounts payable.

Most small firms become insolvent and fail because they often than not could not access financial assistance from the financial institutions due to lack of the necessary requirement needed by the financial institutions.

It was also revealed from this study that there is poor liquidity in most small business in Ghana the small business have current assets in excess of current liability leading to shortage of fund .

There is also poor record keeping system in most small firms which reduces the ability of the firm to monitor the proper flow of their working capital.

The poor working capital flow of the small firms have precluded them from the ability to compete effectively

It was revealed that most small businesses fail at most within 2 years, the strongest will fail within 6 years, while only few surviving ones remain.

The random experts’ recommendation

Business development and management experts have therefore recommended the following as remedy: a strong credit policy system that will ensure that account receivable period is shorter than account payable period; the maintenance of financial manager position within the firm to gauge the credit policy and debt repayment system of the firm, to ensure professional financial management practice within the firm. Where the firm is a small firm the service of a financial consultant could be engaged on regular basis to ensure
strong financial position.

Others are: Periodic financial report should be prepared by the small business owner using the service of a professional accountant; this will enable the entrepreneur to ensure strong financial position; good accounting record should be maintained by the entrepreneur to ensure that all financial transaction is tracked down to avoid leakage in financial transaction.

Also, cash should not be used as gauge for performance, but the financial report should be used rather to gauge performance. Most entrepreneurs only run on cash basis. They only monitor their cash position without taken cognizance of their debt position.


The government should make laws that would guide the debt recovery and credit payment system within Ghana. The current system where your ability to recover debt depends on your firms aggressiveness and boldness left much to be desired

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