Savings as solution to SME financing

Using personal savings means that you exercise total creativity in getting your business off the ground

Dr Sanderson Abel
Cash in hand allows the business flexibility to take immediate advantage of opportunities when they arise, but also gives the SME a critical cash cushion when things turn out not so well during lean period.

In an environment where liquidity is tight, how does one raise the liquidity required to fund one’s small business so that it grows?

Most of the time we think of debt, borrowing from friends, family and even from the bank. Sometime SME owners even resort to expensive options.

Using the wrong kind of financing can sometimes literally destroy a good business idea. Sometimes the key to success is mobilising the right kind of money at each growth stage in the business.

For example, debt may be good for a business, but it may be best to take on debt when a business has run successfully for a while, not when it is just starting up.

It is not only dangerous to start a new business entirely financed through borrowed funds. If the business idea fails, you may fail to repay the loan and possibly damage your financial reputation permanently.

So what is the best way of funding a new growing start-up? The answer, difficult as it may seem is to mobilise personal savings.

Personal savings as a the primary source of financing

Before rushing to your bank to apply for a loan to fund your startup business or even to expand your operations, we highlighted several innovative equity based financing ideas for possible adoption by SMEs.

Savings were one aspect that can prepare an SME business for a successful long-term relationship with the bank. Most successful business people took huge personal financial risk at the onset.

Apart from generating the entrepreneurial ideas that have turned some into millionaires or even billionaires, they sacrificed a huge chunk of personal savings as initial capital investment into their businesses.

Using personal savings means that you exercise total creativity in getting your business off the ground.

You have the flexibility to drive your business in the direction that you want and implement your ideas to the maximum without being accountable to other investors or a bank.

It also lays a strong basis for other investors and lenders to trust you with their money when eventually your business reaches a stage when it needs an external injection of capital.

Therefore, developing a personal savings culture can help lay a sound basis for a successful business in the form of cash in the bank or assets that can be used productively in the business.

Generating internal business savings

No matter how big your business idea is, it is advisable to start small and reinvest the profits into future growth.

This again is a form of savings. In as much as surplus cash is invested in the business, some of the cash should be kept as cash in the bank as much as is possible.

Cash in hand allows the business flexibility to take immediate advantage of opportunities when they arise, but also gives the SME a critical cash cushion when things turn out not so well during lean periods.

Effective use of internal finance also means that you will need smaller amount of initial capital to start the business. Your small pot of personal savings generated during your period of employment may therefore be sufficient to fund your start up enterprise and as you trade, you must reinvest the proceeds and profits into the business.

This will naturally enhance the growth potential of your business. This is called funding the business from “internal resources”, meaning that cash-flows from the business together with your personal savings will fund the initial growth phase of the business until such a time it has gathered credibility to attract outside investors.

Sometimes it is difficult for one to save on their own or in their own business. However, it is possible for SME owners of like mind to form what are now known as Self Help Groups (SHGs), which are traditional savings unions.

In Zimbabwe we know them as “savings clubs”. It is however, important for such outfits to have a self-regulatory constitution that governs the behaviour and contributions by members.

It is also important that the constitution spells out clear financial and banking policies to safeguard the savings of members. After a while the pool of savings can be used as cash collateral in securing facilities from banks.

The business grouping members can also give each other what is known as social collateral, by giving each other cross guarantees for loans accessed. Many potential business people with pretty good ideas end up killing their ideas because they can’t get access to a bank loan.

However, from our discussion above, having a pool of savings and a savings culture within the SME manager or owner makes for easier access to banking facilities in future.

A business that has developed a reasonable saving record is a good candidate to approach a bank for funding.

If you have a savings track record, either in personal or business capacity, it usually demonstrates a level of discipline and patience that will make your SME a good candidate for a successful bank loan application.

  •  Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008

 

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