Raising a R1m overdraft or even a R5m loan is fundamentally different from raising R10m or R20m. As the amounts increase, so do the stakes, the complexity of the structures, and the consequences of getting it wrong. Yet many business owners approach these processes with the same mindset, which is often where problems begin.
A large part of the challenge is that capital raising is not something most entrepreneurs do regularly. As a result, there are gaps in understanding that are not always obvious at the outset.
One of the clearest examples of this is how businesses answer a seemingly simple question: What is the funding actually for?
Too often, the answer lacks focus. Businesses approach funders with a combination of needs, such as acquiring equipment, purchasing property and covering working capital, all within a single request. This lack of clarity can quickly undermine an application. In many cases, the bank will decline without offering much explanation, which is not unusual in the industry. Financial institutions tend to avoid detailed feedback, leaving business owners uncertain about what went wrong.
There is also a tendency among some entrepreneurs to ask for more than the business can reasonably support, assuming that the lender will negotiate downward. In practice, this approach often weakens the overall application rather than strengthening it.
Part of the difficulty lies in the fact that raising capital requires a different skill set to running a business. Many entrepreneurs are highly effective at selling their products or services, but funding conversations demand a different language, a different strategy and a clear understanding of how lenders assess risk.
This is particularly important because not all funders think alike. Some prioritise strong and predictable cash flows, while others focus more heavily on asset backing. Certain lenders have an appetite for growth-stage businesses, whereas others are more comfortable with stable, established operations. Aligning a funding request with the right type of funder is therefore critical.
Where SMEs often struggle is in matching the opportunity to the appropriate funding source. They may approach the wrong institutions, present information that does not resonate, or structure deals in ways that do not align with lender expectations. When applications are declined, the absence of clear feedback can result in the same mistakes being repeated.
However, a positive outcome is not always as straightforward as it seems. When a lender approves funding, it does not necessarily mean the deal is optimal. In some cases, the structure may protect the lender's downside while limiting the business's flexibility or long-term upside. Without the right perspective, it is easy to accept terms that appear reasonable initially but become restrictive or costly over time.
Pricing, however, is only one aspect of the equation. Differences in interest rates can have a substantial impact over time. For example, the gap between a facility priced at prime plus 5% and one at prime minus 2% becomes significant when considered over the life of a loan.
Beyond pricing, the detail within funding agreements deserves careful attention. Many facilities include clauses that can trigger higher costs if certain conditions are not met. These might include missed reporting deadlines, breaches of financial covenants, or performance that falls short of projections.
While these provisions are standard, their implications are not always fully understood, particularly by those without experience in structured finance.
Funding agreements often contain conditions that can materially affect a business over time. These details can influence not only costs but also operational flexibility and future growth decisions. For SMEs focused on securing immediate funding, these longer-term implications are sometimes overlooked.
The way funding is structured is equally important. Different needs require different solutions. Equipment should typically be financed through asset-based facilities, while property acquisitions are better suited to property finance structures. Attempting to combine multiple funding requirements into a single facility, or using funding for expenses such as salaries or marketing, can complicate or even derail an application.
Funders are looking for clarity and alignment. They want to see that the use of funds matches the proposed structure and that the business has the capacity to meet its obligations.
This is where many SMEs encounter difficulty, particularly when it comes to core financial metrics such as debt service cover ratios, which are central to how lenders assess risk.
Preparation before approaching a lender is equally important. By the time discussions begin, the conversation should be well thought through. Likely questions should already be anticipated, and responses carefully considered. This level of preparation can significantly improve the chances of a successful outcome.
There is also value in considering alternative sources of funding. In some instances, businesses may be able to access capital from within their own value chain. Larger partners, suppliers or customers with a vested interest in the business's growth can provide funding solutions that are both practical and strategic.
These options are often overlooked but can be highly effective when approached correctly.
Ultimately, raising capital is not simply about securing funding. It is about securing the right funding, on terms that support the long-term success of the business. Achieving this requires time, focus and a clear understanding of how funding structures can affect a business beyond the initial transaction.
This raises an important consideration around who should lead the process. Capital raising is time-intensive and detail-driven. When business leaders take it on without the necessary experience, there is a real opportunity cost. Time is diverted from running the business, growth initiatives can slow, and key decisions may be made without the benefit of specialised insight.
Even experienced finance professionals may not always have deep exposure to structuring and negotiating complex funding arrangements. These transactions often require specialised expertise and experience.
In the end, securing funding is one thing. Structuring it correctly is another. In an environment where the cost of capital and the fine print of agreements can shape a business for years, that distinction matters more than many realise.
