Be wary of over-optimism

Johannesburg - A common mistake small business owners make when they're seeking loans, is to be over-optimistic about their profitability prospects.

That's according to Chris Delport, chief risk officer at GroFin, a small and medium enterprise financier. The group provides finance ranging between R500 000 and R7m to small and medium-sized enterprises in Africa and the Gulf region.

"One of the most common mistakes we see is that entrepreneurs are over-optimistic about their business plans and projections," said Delport.

He said those seeking funding are so convinced that their ideas will work that they either refuse to take a realistic view of their market, or dismiss it.

Other common mistakes made by entrepreneurs when drawing up cash-flow projections, include assumptions that all clients will pay in cash, paying themselves a salary far sooner than the business will allow, poor management of working capital, uncompetitive or onerous supply terms and bad management of stock on hand.

So, how do you work out whether you're being over-optimistic when you put together your business plan and cash flow forecasts? Experience is invaluable in being able to get a realistic idea of how a business should perform.

"Experience is an important aspect for us to consider when we're approached for funding," said Michael Lombard, GroFin SA managing director.

If in doubt about whether or not your forecasts are realistic, you should consult an outsider - preferably someone with industry experience - to take a look at your figures and see whether he/she agrees.

A good mantra that small business owners should remember is to under-promise and over-deliver - it will reassure your backers that you're on the right track.

Lack of funding for start-ups

A key concern for aspirant small business owners is a lack of available funding; this is where development funding organisations can play a critical role.

Traditional banking channels have been criticised for only supporting businesses once they have established some form of trading history that can show revenue and profitability.

Lombard said one of the things that made GroFin different from traditional funding lines was that as long as the proposed business is viable, it will consider funding it, despite no contribution or collateral on the part of the entrepreneur.

Asked what would put the company off investing funds into a business, Delport said the business owner had to be an active participant in the business.

"The entrepreneur has to be involved in the business, he cannot just put somebody else in charge to manage it."

- Fin24.com