What can your business do to take advantage of the most powerful resource you have? Business credit and capital

Here’s how your SME can benefit from taking on a working capital loan to help your business with its day-to-day operating expenses, cashflow and even expansion.

According to an article by the World Bank; "access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries." 

You know the feeling, right? You've got a great idea to start a business or grow your existing business and you're ready to go. But before you can get started, you need resources - people, information and money. We'll assume you already have the first two sorted. Let's talk about money. And not just any money—you need more than what you have in your bank account.

And that's where credit comes in a.k.a working capital.

Individuals, micro and SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and/or grow their business.

About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account. (source)

The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. (source)

What's Credit?

Credit is a loan that gives you, as a business owner, access to funds at a time when you need it most. The credit is secured by collateral (like real estate or other assets e.g. mutual fund). 

In business, credit plays a crucial role in its growth. Many small business owners, including freelancers, gig-workers and sole proprietors, do not yet understand how credit works and how to take advantage of it. 

Having a strong credit score is essential to their survival, but even more important is having access to credit.

A fact. When it comes to getting your business up and running, you don't have to spend all the money you have. You just need to leverage your credit so that when the time comes for you to invest in new equipment or pay staff members, it doesn't feel like a huge burden.

Here's how to use credit as leverage to grow your business.

1. Be aware of your credit score

Your credit score is a numerical measure of your financial behaviour that lenders use to determine whether or not they will lend you money. Is your creditworthy? It can also affect your ability to get better rates, as well as other types of financing. Your score is created by looking at the history of your payments and debt balances over time, along with other factors like income level and length of time since opening an account with a bank or other lender.

2. Understand the basics of using credit

Credit is one form of access to capital that most people will use at some point in their lives. Some types carry lower interest rates than others do, which can make them more cost-effective for borrowers who may only need a small amount of money right now but can repay the debt later on down the line (if needed).

Access to credit plays a crucial role in business growth. Many business owners, including freelancers, do not yet understand how credit works and how to take advantage of it. 

Here's how to use credit as leverage when you're trying to grow your business:

3. Understand What You Need

If you're just starting and don't know what types of loans or lines of credit are available for your line of business, reach out to a financial institution (bank) or lender. They'll be able to help you find the best options for your situation.

4. Keep Your Costs Low

While there are many options for funding your business, consider keeping your overhead costs low so that you can get back more money from the loan or line of credit than you put in at the beginning of the process.

5. Know How Much Money You Need In Advance

Some loans and lines of credit require that borrowers pay a percentage upfront before they receive any money back from their lender; this is called a pre-qualification process where borrowers are evaluated based on their financial information before being approved for funding resources like loans or lines of credit.

6. Don't Forget Insurance. Insure your health, then your business

Depending on the amount you're requesting, some lenders package the loan alongside an insurance plan that protects them in case of eventualities. The most common general liability, commercial property and product liability insurance. Usually, these costs are factored into the loan in advance. 

It's also essential that you get personal insurance for yourself and your team if you have one. The saying that health is wealth is not a forgone maxim. This is your responsibility. 

I know you've been paying out-of-pocket for your healthcare and so far, you're still alive. The question is 'where do you get the money out from?' - savings, business capital, profit, loan???

Here're some checks you should know about yourself before you dash off to the lender:

1) Know your limits and boundaries. Is there anything you're not willing to do? What are the risks you're willing to take? Will you ever borrow money from family or friends? Do you know what kind of debt will negatively impact your life?

2) Make sure your debt isn't too high or too low. If it is too high, then cut back on expenses until you can afford it again; otherwise, consider lowering your debt amount by refinancing or taking out another loan that has favourable terms and conditions for both parties involved (taxes included).

3) Always pay off debts on time and in full every month! If something comes up unexpectedly—such as an unexpected expense—then put some money aside for that purpose first before making any other purchases

What We Do

A key area of the Moor Project is to improve the underserved people's access to finance and find innovative solutions to unlock sources of capital. Follow us on social media if you are not already.

Our approach is holistic, combining advisory and lending services to clients to increase the contribution SMEs can make to the African economy including underserved segments such as creators, freelancers, gig-workers and women-owned SMEs.

---

About The Africa Tech Memo (Moor)

Get smarter, especially as a creator, about the most important stories in tech, media and the creators' economy by following Africa's most-read creators newsletter.

Read the Archive | Follow us on Twitter

See you at the top. 

Cheers!

Samson

Photo by Karolina Grabowska