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Accessing funds from banks: Basic pointers for SMEs

BY: Charles Benoni Okine

SMALL and Medium Enterprises (SMEs) are the backbone of the Ghanaian economy as they represent about 85 per cent of businesses, largely within the private sector, and contribute about 70 per cent of Ghana's Gross Domestic Product (GDP).

These basic facts about SMEs in the country ,therefore, bears testimony to the fact that the sector has the capacity to completely or to a large extent turn around the fortunes of the economy and the owners of small and medium businesses.

In this piece, four basic tips about SMEs, irrespective of size, is discussed as a guide to help them access funds from the financial institutions.

Business plan

Many people who want to start a small business fail to take the first step of having a business plan. It is simply a written document that describes in detail how a business—usually a startup—defines its objectives and how it is to go about achieving its goals. It short, it lays out a written roadmap for the firm from marketing, financial and operational standpoints.

There is a common allegation many such SMEs make. To them, banks refuse to lend funds to them to start or run their business. However, most of them fail to appreciate the fact that the money sitting with the banks are for depositors who have left their money for safekeeping and to earn some interest. Therefore, before a bank lends to an SME, it must be sure of who it is lending to and for what.

In effect, the bank must tell that the business is set up with an effective strategy for growth; it is able to determine its future financial needs and at least, it able to attract investors which can be angel investors and venture capital funding or and lenders such as banks. Once a bank is convinced by seeing a serious business plan, it is confident to lend the money and even offer guidance.

This means that business plans are crucial for the success and survival of SME’s.

Bookkeeping

One of the basic mistakes many SMEs make is their inability to do one simple thing – bookkeeping. This means, there is no financials which the banks so badly require. But this is a very critical aspect of running a business. Simply put, bookkeeping is the process of keeping track of every financial transaction made by the business on a daily basis. Depending on the type of accounting system used by the business, each financial transaction is recorded based on supporting documentation. That documentation may be a receipt, an invoice, a purchase order or some similar type of financial record showing that a transaction took place.

In going for a facility, banks usually would want to see the books (financials) of the SME before they can have the confidence to advance funds to increase stock or for any other things which is business related.

Savings culture

To many SMEs, they can only save when the profits are big. Otherwise, deliberately setting aside bits of the day’s profit into savings is a no no.

There is a common saying that little drops of water makes a mighty ocean. Therefore, making it a habit to set aside a small percentage of profits made daily is crucial in that, over time, your saving culture will lead to building wealth.

Collateral

The term collateral refers to an asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan. The collateral acts as a form of protection for the lender. That is, if the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses.

In Ghana like many other jurisdictions, this is required. As mentioned earlier, the monies with the banks is not for free. It belongs to people and business owners and ,therefore, at the time they come for it, the bank must be able to pay. So at least, SMEs must ensure that they have something to prove as collateral so in case something goes wrong, there will be no burden on the bank.

Way forward

Some banks are doing a lot for SMEs to at least overcome their hurdles.

For instance, the Access Bank holds a lot of capacity building workshops and clinics for SMEs. The bank has special desks for advisory services.

Another intriguing thing has to do with the less rigorous loan requirements. It also ensures lending against turnovers with no tangible collateral.

SMEs must, therefore, ensure that while adhering to the requirements, they visit banks and financial institutions that are friendly and ready to hold their hands all the way.