SMEs aren’t prioritising governance – here is why they should

For a lot of SMEs, governance is often the last thing they consider because it’s not applicable to most businesses for maintaining compliance. But, when it comes to raising funding, governance becomes essential.

Good governance can be a big benefit to SMEs, even if it can also be an administrative headache. It really does go a long way in lifting credibility, and this is crucial if SMEs are looking to grow, which is often best achieved through funding.

The potential for SMEs in South Africa to change the narrative on unemployment is huge – and they need assistance to achieve this. It’s common knowledge that government plans to provide SME support but this could take a long time and many viable SMEs may not survive in the interim. SMEs should look to governance as a key(and ongoing) strategy to put themselves on the funding map.

Lenders are looking for SMEs that are (already) well governed

There are many opportunities for SME funding beyond government or the big banks, but if an SME doesn’t prioritise its governance before coming to market, it can often be too late to attract funding. Among the first aspects lenders will look at when applicants apply for funding is what an SME’s governance is like, along with conducting credit checks and references.

Examples of good governance include having an independent board, even if not required. It is seen as a strong governance mechanism by funders for an SME to have oversight and independence in its business. They are still an SME, but their philosophy and conduct are different if applying the principles used by established, bigger businesses, even though running a smaller operation. Even just having certain policies in place, like an anti-bribery and anti-fraud policy or creating a Social and Ethics Committee can count as these measures prove an SME is running its business with high integrity.

A good reputation goes a long way

It’s crucial to choose business partners and shareholders who value integrity as well, and who can add value to the business. Reputational damage can make it more complicated for an SME to raise capital.

Sometimes shareholder selection is done out of loyalty but without proper background checks. One might think someone will be a good fit, but they may have a negative reputation in the market, or a blemished credit record, making it essential to vet individuals and choose selectively. If one doesn’t, it can play a significant role when funders are making their assessment. They will look at all involved in the business and if there are any issues, it’s usually an immediate decline on funding, right at the outset. This is difficult as the funding need is still there, but opportunities are limited because of ignoring best governance practice.

It’s critical that one determines that shareholders and directors of the business have a clean record and the credentials that can support lending to the business. A lot of the time, this is not at the forefront for SMEs, but it needs to be, even if they only intend to apply for funding down the line.

The devil is in the details

For SMEs looking to evolve into bigger businesses, the details matter, and often applying to lenders without the insight into what they are looking for, can lead to frustration and a lack of results.

This is why it’s important to get credentials in order as soon as possible, and to align with a funding partner who shares an SME’s vision. It’s vital to network with the right business partners or investors. At Paragon Debt Advisory we are aware of the appetite to lend within our vast funding network, and we keep potential funders informed on what is being done to improve an SME’s governance, to align reasonably and realistically with lending parameters, and to successfully secure funding.