Just the mention of the term ‘cash flow’ will give most small business owners and entrepreneurs nightmares. Here is how not to wake up with a cold sweat.
Ask yourself: As a small business owner, would you rather spend 12 months trying to get money from a bank (at prime) and then end up not getting the funding? Or, pay up a little and actually get the money with a funding partner that knows your business and is prepared to work with you rather than against you?
Now ask yourself: Is the cost of funds the only thing to think about when borrowing money? What about how long it will take or, even worse, the high probability of being rejected? We know businesses see borrowing as a grudge purchase, but does it really have to be?
According to our CEO, Brent Geddes – a forward-looking lender that has worked with businesses in need of funding on four continents including 10 African countries – one mustn’t just look at the interest rate, but also the other costs associated with borrowing money.
Financial Alchemy is a way that a lot of other lenders can structure fees into the loan to increase the rate customers pay substantially.Brent Geddes, CEO of Geddes Capital
Now, what does Brent mean by “Financial Alchemy”?
Well, have you ever noticed that there are raising fees, document fees, and monthly admin fees? These are all ways to raise the cost of funding while you are staring at the interest rate alone.
Another method is to charge you an “upfront” finance fee and then “no interest” for the entire term. While this seems cheaper it can actually be more expensive. An upfront fee of 20% can equate to over 30% a year in interest!
The cost of borrowing can be quite a complex thing to get to grips with as this is where the smoke and mirrors can come in.
Indeed, a good ‘understanding’ of cash flow is at the root of business funding. Here Geddes outlines a handful of vital points.
A company's gross profit (sales less cost of sales) needs to be able to cover operating expenses (normally the biggest and most important of these is salaries and rent) and then have enough to cover the cost of any loans that the business has taken out.
If there is sufficient cash flow left after these, then the business has the ability to take on additional funding to assist with growth, assuming, of course, that the opportunities exist.
In addition, we always advise that companies never let their payments for VAT, PAYE, and employee tax get out of date. Many companies try to delay paying their tax payments to help with their cash flow and then forget to keep enough to settle SARS.
Firstly, as a small business owner, you need to understand that it’s a bit of a balancing act between borrowing to grow, but still maintaining a slightly conservative approach to help when things don’t go according to plan.
Debt can be a scary word for entrepreneurs and is very much a double-edged sword.
In simple terms, if it works for you and the business has the cash flow to service the debt, it can help significantly grow the business. However, if it goes wrong, it can (very quickly) lead to the demise of the business.
At Geddes, we have seen a number of businesses that were too overly geared when the lockdowns happened and subsequently did not make it.
The businesses that had less gearing and more conservative balance sheets were able to make a plan and survive, this is where the balance comes in.
In simple terms, the return and growth potential of the opportunity must be greater than the cost of the money needed to pursue it.
Often smaller companies struggle to get terms with their suppliers and need to pay for goods upfront and then try to win customers by giving them 30 or 60 days to pay. This can be a dangerous situation.
At Geddes, we offer an Invoice Discounting product that comes in handy where our clients can turn their invoices into cash to cover the costs of their suppliers and other business expenses.
Geddes Capital also offers a wide variety of tailored secured funding options to match a customer's cash flows and make it easy to repay.
We can assist with general business loans for working capital, trade finance and inventory finance. Often our customers know they need funding but don’t know the best way to access and structure it. We pride ourselves on being able to customise funding to suit their needs exactly.
Spending money you don’t have to grow revenue and build a company is how a lot of the tech businesses in the developed world grow, but they have access to huge piles of early-stage capital and investors.
We are not as fortunate in South Africa. We always say that one has to afford to be an entrepreneur.
Unless you have a shareholder with a large balance sheet to continue funding growth, we recommend a more conservative approach to grow within oneself with a financial partner like Geddes Capital ready to assist.
At Geddes, we can issue a loan within 5 to 10 working days depending on the type of loan and how fast we receive the due diligence documents from you.
South African banks are becoming rather cumbersome and tend to focus more on standard home loans, vehicle finance, and the listed corporate lending transactions. They also tend to take too much time (sometimes up to a year). We find that in the SME space, the banks don’t have the resources and systems to deal with the niche and specific circumstances that we come across and deal with in every deal.
What should SMEs think about when they are looking for the right partner to fund them? It’s natural to think price is the only factor. While it is a massive part of your decision, you also have to consider how long it will take to get funding and how well your funding partner understands your needs.