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Johannesburg - If you plan to approach a bank for funding, stress-test your business model first for your best chance of success.
The 2008 Global Entrepreneurship Monitor (GEM), conducted annually by the University of Cape Town's Centre for Innovation and Entrepreneurship (CIE), ranked SA 23rd according to early stage entrepreneurship activity of 7.8% - the percentage of adults who started their own business within the last 18 months.
SA's ranking places it below most middle- to low-income countries.
CIE director and GEM researcher Mike Herrington said the statistics are an indication of the high failure rate of start-up businesses in the country.
A key problem contributing to this is the inability of entrepreneurs to develop and execute a fundamentally sound business strategy.
A recommendation made by industry experts is to perform a "stress-test" on your business, to assess its long-term sustainability particularly in trying economic times.
This could prove useful to financial institutions as reassurance that the person they are lending money to does not only have a "best case" business plan.
Prepare your worst-case scenarios
When approaching your bank, you could show them that you have:
- Assessed the effect of the loss of a major client and can continue to function or source new business;
- Weighed up the effect of a supplier changing payment terms, or being forced to change your supplier;
- A good grasp of how your cash flow will look over 12 months and have factored in lower sales, tightening margins, bad debts and higher borrowing costs;
- An ability to develop a realistic sales outlook;
- An understanding of how much capital is needed to run your business; and
- The skills needed to execute your business plan.
Head of small- and medium-sized enterprise (SME) propositions at Standard Bank Amrei Botha said financial institutions demand meticulous paperwork and research before putting money into small business ventures.
"Too often they [the entrepreneurs] have not paid attention to assessing the business viability, or set out profitable margins and calculated realistic sales forecasts," she said.
- Fin24.com
