Despite access to finance consistently ranking among the most significant barriers to business growth, FinMark Trust estimates that only 20% to 30% of MSMEs in Sub-Saharan Africa manage to access formal credit.
For many business owners whose companies are trading, winning customers and meeting their financial obligations, a funding rejection can be difficult to understand. However, funding decisions are generally based less on a judgement of the business itself than on the funder’s assessment of risk.
Here are five common questions SMME owners seeking finance ask Sourcefin when traditional funding has fallen short:
Why was my funding rejected when I’m trading and delivering?
A trading history is important, but it is only one part of a funding assessment. Funders also consider whether the business can continue meeting its financial obligations if circumstances change.
Potential risk signals include cash flow volatility, heavy reliance on a small number of customers, persistent overdraft use, high fixed costs, narrow margins or limited capacity to absorb late payments.
This is why bank statements form an important part of many funding applications. They show how money moves through the business over time. Alongside contracts, invoices and financial records, they help a funder understand whether the business is trading sustainably and can afford to repay the funding.
What matters more: turnover, profit or cash flow?
Each tells a funder something different. Turnover shows the value of sales, profit shows what remains after costs, and cash flow shows whether the business has enough money to meet expenses and repayments.
This is particularly important for businesses supplying corporates or government entities on extended payment terms. A contract may be profitable, but the business can still run short of cash while waiting 30, 60 or 90 days for payment.
Funders therefore look at how consistently money comes in, regular expenses and debt repayments, and whether contracts or invoices are likely to be paid. Strong turnover and margins matter, but a business also needs to show that it can manage its cash and meet repayments.
How much does my personal credit score affect business funding?
For many smaller businesses, the finances of the owner and the business remain closely connected. Personal credit history can therefore form part of a funding assessment, particularly where the business has a limited trading history or financial track record.
It should, however, not be the only consideration. A business that has been trading consistently, has credible contracts and can show that it can afford the funding presents a different risk profile from one with little or no trading history.
Innovative funding providers also take different approaches to assessing applications, and this is where open-minded, future-focused funding comes into play. Providers like Sourcefin place more weight on the opportunity being funded, and its ability to support repayment, rather than relying mainly on the owner’s credit history.
Is alternative funding more expensive?
The cost of alternative funding varies depending on the provider, the type of finance and the risk involved, so comparing it with conventional lending on price alone does not always tell the full story. Sourcefin’s research among SMMEs found that the most important factor for business owners when looking for finance was understanding actual SMME needs and solutions that were tailored to them.
Alternative funding can be particularly useful when a business has secured an opportunity but needs capital to deliver it, whether to buy stock, fulfil a contract or manage cash flow while waiting for payment. Some funders can also structure repayment around when the business gets paid.
The real question, therefore, is not simply whether alternative funding costs more, but whether the opportunity it unlocks is worth more than the cost of the capital.
Why do funders say yes and then change the terms later?
An initial approval may be subject to the funder verifying financial information, contracts, suppliers, customer payment history or other details of the transaction. If those checks reveal risks that were not clear at the start, the amount offered, cost, or repayment terms may change.
Providing complete and accurate information from the outset can reduce the likelihood of surprises later. Business owners should also ask what conditions still need to be met and what could affect the final offer.
What funders are ultimately assessing
While funding models differ, most funders want to establish three things: can the business deliver on the opportunity being funded; can it continue operating if a customer pays late or costs increase; and does the owner understand the financial implications of taking on funding?
That means being able to provide clear financial records, credible contracts or invoices and realistic cash-flow forecasts. It also means knowing the margins on the work being funded, what it will cost to deliver and how the funding will be repaid.
Understanding how funders make their decisions cannot guarantee approval, but it can help SMMEs approach funding discussions better prepared. When traditional funding falls short, alternative finance provides another, and often more tailored, option. Alternative funders are more likely to assess applications differently, looking at the deal in hand – such as a confirmed purchase order, contract or invoice – rather than credit history.
Open-minded funding working alongside trusted banking is something that is garnering traction. In an effort to support more SMMEs, Sourcefin has recently entered into a referral arrangement with FNB, where FNB can now refer eligible business clients for consideration for purchase order financing.
For businesses with viable opportunities but limited access to traditional credit, alternative funders can open the door to solutions that are catered to the realities of SMMEs, enabling them to deliver on deals and grow sustainably.
Written by Jedd Harris, Chief Strategy Officer at Sourcefin