COLUMN – Money access: a mystery or break?
For the budding or established entrepreneur, access to finance has always been a severe challenge, regardless of the stage at which their project/business may be at. The market for financing of entrepreneurial activity is by virtue of the state of development of our Third World/developing country economies virtually non-existent; however, there is great demand for such finance.
In the current state of play across our landscape, much of this financing has not moved past the first tier of start-ups utilizing personal and family savings and a premature dependence on loan facilities from our banking and credit union sectors, who themselves are trying to evolve their services in the context of the inherent challenges and risks in economies such as those across the Caribbean region.
It is fair to say that successive Governments have taken steps to assist in providing finance, but we must just as readily acknowledge that there is no way Government (ours or any other) can take on the lion’s share of this. We therefore need a different approach that creates a stable financial subset within a well fashioned ecosystem to support entrepreneurial activity in Barbados and the region, and one that clearly articulates lines of responsibility and accountability.
The entrepreneur. Many times it is us as entrepreneurs who make access to finance an even greater challenge than it needs to be due to our approach to management and planning in and for our businesses, whether we want to admit it or not. So what are the key responsibilities for the entrepreneur throughout his/her venture, if they are to overcome and make the road to accessing finance appear more paved with possibilities than riddled with potholes?
1. Always have a business plan, regardless of whether it is a start-up, expansion, sale or other stage of your business/project. It provides a roadmap for the entrepreneur and prospective investors and lenders.
2. Have a cash flow projection based on the business plan –– paying specific attention to when there will be surpluses and deficits of cash. It forces thought on how to manage both the surpluses and financing of shortfalls; but also ultimately the benefit of planning is realized.
3. What would you use acquired financing for? Will it be used for capital expenditure (acquiring buildings, equipment) or revenue expenditure (to meet daily expenses, acquire inventoryand so forth)? The type of finance and the length need to be matched to the purpose of the financing.
4. Keep sound records and ensure these are updated weekly, using a proven financial software, and reviewed by a qualified person, especially where not entered or prepared by one.
5. Prepare adequately before making any application for finance. Do not make a premature application driven by an emergency or other critical need. Your success depends on the rigour of your application and its supporting information.
6. Maintain open communication with your bankers/financiers at all times, even when a facility or request is declined.
Many bankers or financiers have lamented the lack of sound record keeping by prospective borrowers, especially those coming forward as self-employed or entrepreneurs, as being the biggest hurdle to lending even before considering the strict policies and risk profile of the bank. As borrowers, we must remember that it is our responsibility to prove to the bank that they can and should lend to us as businesses –– there is not and neither will there ever be any obligation on their part. Their obligation is to their shareholders and staff.
The bank or lending agency. Owing to a lack of other options, debt financing has become a primary source of funding for many businesses. So what do I see the key responsibilities of the bank to be?
1. To protect its interest, adhere to requirements of the regulators in using customer funds;
2. To consider each application from entrepreneurs on its merit;
3. To clearly articulate the bank’s assessment, risk approach and need for sound financial information;
4. Provide timely responses on applications;
5. Get to know the applicant/customer and their business through relationship building and trust;
6. To work with other stakeholders to provide support to applicants not meeting the grade in order
to invite them back for a second application at the appropriate time in the future;
7. To support initiatives that would expand the finance ecosystem and change their risk profile.
There is often some mismatch occurring in the system where the source of funds does not match the intended purpose for the funds. Bank loans ideally should be used to finance long-term activity and not short-term operations, and this in our market therefore dictates that alternatives to bank financing are now critical. Banks and financial institutions are under more scrutiny now than ever before which brings with it increased regulation and oversight.
Some alternative approaches.
1. Angel investing/financing. With the Barbados Entrepreneurship Foundation successfully launching the Trident Angels Network and with the first investment into one of the projects pending, future success is imminent. I often liken an angel network to what I call Robin Hood economics –– linking the haves with the have nots (albeit without any violence or theft) –– on the basis of merit and a good business pitch. Angels have the option to retain their equity stake, reduce it, convert it to another category of equity or fully withdraw after the agreed period.
2. Venture capital funding. We have had a few venture capital funds in Barbados over the years but with limited success. Most venture capital investments are for a period of seven years with full repayment due at end of stated period with annual dividends during the investment period.
Such arrangements are often more formal and stringent than an angel investment arrangement, but provide useful options when seeking to expand or stabilize a business with a controllable debt profile.
3. Stock market listings. These listings have been seen to be the purview of big business rather than realizing that it has often been the mechanism via which big businesses were created. Offering shares in any project, venture or business to the public is a big step and, apart from diversifying ownership, brings a whole new layer of regulation and reporting.
Locally, we have had Government allude to the creation of a junior stock market with mixed reviews. I still believe it to be a viable option, once the parameters are clearly articulated.
4. Grant funding. Grant funding or, as some refer to it, “free money” is often available to support expansion through export or for the development of business in new sectors. Application for such funds is tedious and lengthy, but is a good way to finance entry into new markets.
Essentially, many businesses, based on their business plans and models, will have to use a hybrid mix of all of the traditional and alternative sources throughout the business life cycle and at times simultaneously. The critical issue, however, centres on the responsibilities of the entrepreneur, the lender and the market economy.
We need to see a greater focus on the alternative equity sources of finance due to the heavy burden that debt financing is placing on many of our start-ups and young businesses. A real opportunity now exists for cooperation between private interests, the banking and financial services sector, and with keen support from Government, for this focus to be realized.
Equity finance can grow with a business, but many times debt financing prevents the growth of the business and, of course, carries the additional hurdle of provision of security and personal or other guarantees.
(David Simpson is managing director of Prestige Accounting Inc. and a director of the Barbados Entrepreneurial Foundation.)