[Opinion] How to approach funders in the event of a change in the repo rate

South Africa’s recent 50-basis-point IncreasingIn the repurchase RateThis was the highest increase since January 2016, at 4.75%. Rean Bloem, general manager of funding at Retail Capital, says while it didn’t come as a surprise, that doesn’t mean that it’s any easier for SMEs to navigate.

This was not the first increase this year, and it won’t be the last. SME owners have more time than the pandemic which seemed like it was coming out of nowhere.

Consumers and businesses both suffer from the repo rate’s knock-on effects. From property purchases and leases, to vehicles and fleets, to food on the shelves – everyone up and down the supply chain will be under pressure to either increase prices or absorb the rising costs.

Add to that warning that the fuel price will increase by a record amount at the end of June – unless government extends the fuel levy grace period it announced a few months ago – and incessant, and seemingly never-ending bouts of load shedding and unplanned outages from a utility whose tariffs keep going up. SME owners should be aware of the warning signs.

It’s not the end of the world – far from it. Although it will be more difficult, we learned from the pandemic that there are some things that SMEs can do to weather the storm, and perhaps emerge stronger when conditions change again.

It is well known that SMEs need to have access to funds to grow and thrive. The opposite is also true – a lack of access to funds is often the reason a business stagnates or even perishes. As every small or micro business owner will know, obtaining funding from traditional banks is near impossible, especially for those that don’t have a particularly long track record.

Many banks have requirements that are too high for small businesses. This is why the original Covid-19 rescue program, which relied on banks to bail out businesses below R10m, was so successful. Banks aren’t bad or heartless, it’s just that the nature of their business and obligations mean they need certain boxes to be ticked.

What can entrepreneurs do to make it happen? Some entrepreneurs remortgage homes while others borrow money from their family and friends. Others use their savings. While these are often welcome, especially when a business is in trouble or needs to scale, they’re not ideal. What happens if your friend demands repayment?

Credit line safety net

What a business wants is a credit line that it knows is available so that when an opportunity arises or a large client doesn’t pay, it can take advantage of the opportunity or stay afloat until money comes in. That safety net is worth its weight in gold – we saw it during the pandemic. While businesses that could afford to pay employees had time to change and innovate, others used funds for e-commerce investments, such as to set up ecommerce shops.

The biggest misconception among small-business owners is that funding should be sought only when it becomes necessary. It should be the opposite. Better terms can be secured by applying for SME funding while things are still good.

If the entrepreneur waits until the business is about to fold, or if it is navigating very difficult times, the terms and repayment conditions won’t be as favourable and in most instances the amount of funding available will have decreased.

While it might seem counterintuitive to actively search for funding lines as the repo rate rises, this increases the costs of servicing the finance. However, there are some things that a business can do to make itself more attractive to funders – and the terms it is offered – while increasing its ability to service the repayments.

Payment methods via digital means

The first is to make use of digital payment options. This is vital because alternative funders have technology which can score a company based on its digital record. Beyond this, agile funders are able to provide funds for an enterprise as young as six months old – something unheard of in the traditional bank lending space.

Making use of credit and debit card machines is essential. This is possible because non-bank debit card machine companies make it affordable and simple to use. Similar applies to other payment methods, such as QR payments or online credit card payments. Make sure you have a digital track record.

Reduce your costs

SME owners need to think about how they can reduce their costs. Is it possible to renegotiate your lease agreement? Do they have bulk order specials? Are you ready to diversify your suppliers? Reduce operational costs by looking at ways to do this.

The important metric is money in minus cash out. The more appealing the difference is, the more appealing the business to funders. But, most importantly, the more capable the company is of surviving difficult times and repaying funding.

There is no one who wants to raise prices. Everyone wants to absorb input costs as they’re afraid of losing customers. Margins cannot be squeezed beyond a certain point. Consider testing a few price increases – perhaps on a single line of products or services – on the market. You have the potential to increase your margins by getting positive reactions from customers.

Offer specials and try innovative ways to increase your customers’ spend. What are some ways to get customers to spend more on their products? What about a discount for larger or more bulky purchases? Try new ways to increase your revenues.

Save money

Do everything you can to save cash and build a buffer between your business’s financial future and the real world. When the going gets tough, a business that has a few months’ operational capital set aside is likely to emerge intact whereas the business without this may well fold.

While many may see these as “basics”, that’s exactly what business owners need to get right now to open more attractive funding lines for their businesses – before they need it.

There are many ways to use the money once these funding lines have been opened. These include making growth investments like new machinery or an online store, as well as capitalising on bulk sales. Alternative funders such as Retail Capital don’t put limits on what the money can be used for, and so knowing there’s a safety net for working capital if required, or the ability to purchase a power backup solution, can give a business owner peace of mind to confront difficult times with confidence.

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