I AM AN ENTREPRENEUR
Find paying clients to fund your start-up
If you have a product or service you can sell, this is the way to go, writes Andile Khumalo
In almost every conversation I have with entrepreneurs they tell me their number one challenge in life is access to finance. Small-business owners are hellbent on the idea that they cannot start their businesses, let alone grow, without some form of capital injection.
There is no doubt SA could do with a bolder equity investor pool, but, not unexpectedly, such investors are few. The risks attached to equity, especially at an early stage, are unattractive when compared to other options these investors have.
Debt is often the preferred option of entrepreneurs because it's generally cheaper and one doesn't have to sell a share of the businesses to get it.
However, the part that no-one speaks about is the "fundability" of the many SMEs that lament the poor supply of debt to them. The truth is that many of the businesses that want debt funding cannot justify it, mainly because of a bad business case to lenders. Generally, debt and its interest need to be serviced. This means the business case needs to prove that cash flows will be generated to service and settle the debt. Without that, it would be virtually impossible to secure debt funding.
So, if I can't get equity for my small business because of the inherent risk and I can't get debt because I haven't yet built a credible case for lenders, where do I go?
Go find a paying customer.
The retail industry has the most potential for this type of empowerment because of its unique scale and customer reach
Yes, of course, you may need some capital before you get to the stage of finding that customer, and for that there is no better funder than the infamous FFF - "Friends, Family and Fools". But if you have a product or service you can sell, your best bet is to secure a paying customer as it is by far the best way of raising capital and building real value.
That is why the concept of "access to markets" is so much more potent in supporting entrepreneurship than the concept of "access to capital" - capital tends to follow markets. Often this means big businesses must use their leverage and scale to give market access to SMEs.
The retail industry has the most potential for this type of empowerment because of its unique scale and customer reach. Providing shelf space in their outlets provides much-needed access and liquidity to budding SMEs, provided they pay them on time. In addition, these retailers must also provide the support that SMEs need to learn the ropes of retail and grow their offerings. I recently came across how a small family business did this with Shoprite Checkers.
Two years ago, Mabel and Wale Akinlabi started Browns Foods, a frozen convenience-food business that launched with their popular Browns Corn Dog range.
Neither had any prior experience in food production or retail but they had a good product and fire in their bellies. I found it interesting that the key that unlocked their ability to supply more than 100 Checkers stores around SA was a relationship they built with a gentleman named Promise Mpele. He is a buyer at Checkers and made it his business to hold these entrepreneurs' hands through the process of taking a product to market through the retail network.
"We asked what pricing would be fair, we wanted to find out what regions we should go into, what distributors we should use, do they like our packaging, what do consumers like? Information that we could've learnt painfully, but our buyer held our hands through the process," says Mabel.
For entrepreneurship to thrive, we need paying customers willing to support SMEs.
Khumalo is CEO of KhumaloCo and founder of I Am An Entrepreneur
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