It’s a common conundrum for start-ups and SMEs in South Africa: They are generating revenue but lack capital or tangible collateral to access growth capital. Despite having a great product, passion, and a vision, they’ve outgrown bootstrapping and hit a wall where further progress demands investment.
Founders might have respectable personal credit scores, but their limited business credit history prevents them from turning to traditional lenders. They might also want to avoid taking on debt.
This may leave them stuck, unable to scale operations, make new appointments, or seize opportunities. Fortunately, alternative financing solutions like revenue-based finance (RBF) and invoice-based finance (IBF) can provide accessible capital while laying the groundwork to establish creditworthiness for sustained future growth.
Business credit history
Maintaining a strong business credit profile is vital for a company’s health and growth, offering access to better financing, higher credit limits, and more favourable supplier terms. It reduces borrowing costs, enhances cash flow flexibility, and can even lower insurance premiums, while building trust with partners, investors, and customers. New businesses lack the kind of financial data that would reassure the bank about its ability to repay a loan. Much like a personal credit profile, lenders rely on past performance to predict the ability to repay, and early-stage/small businesses cannot demonstrate enough consistency in cash flow to qualify for a loan.
Banks avoid doing business with clients without a solid credit history because they need a proven track record of stable income and repayment history.
For South Africa startups and/or SMEs, alternative finance can be the answer.
What is alternative finance?
Alternative business finance refers to non-traditional funding options available to businesses that may not qualify for bank loans or prefer flexible financing solutions, unlike conventional bank loans, which require strong credit history, collateral, and lengthy approval processes.
Two attractive alternative finance models are RBF, where businesses receive funding in exchange for a percentage of future revenue, and IBF, which allows them to borrow against unpaid invoices. Other options include crowdfunding, peer-to-peer lending, merchant cash advances, and venture capital.
Understanding RBF and IBF:
Alternative financing offers more accessible funding with tailored repayment terms, helping businesses manage operations, grow, and build creditworthiness.
Unlike bank loans, RBF requires no fixed payments or interest, and repayment amounts fluctuate with business performance. In contrast to equity financing, investors do not gain an ownership stake, and businesses can get quick access to funds.
RBF is ideal for early-stage/small businesses with consistent revenue but limited credit history, particularly in SaaS (software as a service).
Businesses tend to use RBF for expansion, marketing, or operations while maintaining financial flexibility. Invoice finance helps businesses improve cash flow by using unpaid invoices as collateral, which can be used to cover expenses like payroll and supplier payments while waiting for customer payments. Businesses pay a fee for this service, making it a useful solution for cash flow gaps and limited access to traditional credit. Lenders can advance up to 90% of the invoice value, with the balance settled after customer payment with fewer fees.
This method works best for businesses with strong sales but slow-paying clients.
How to make your company attractive to funders:
1. Maintain transparent financial records
Lenders and investors assess funding eligibility based on financial health. Therefore, early-stage and small businesses should keep accurate and updated financial statements; use accounting software to track revenue, expenses, and cash flow; and maintain a record of customer payments, outstanding invoices, and revenue trends.
By demonstrating financial transparency, startups can build trust with lenders, increasing the likelihood of securing funding.
2. Grow your customer base and revenue stream
Early-stage and small businesses’ ability to generate consistent revenue is crucial for qualifying for RBF or IBF. Steps to strengthen revenue streams include:
- Diversifying customer acquisition channels to reduce dependency on a single client;
- Offering incentives for early payments to maintain steady revenue generation; and
- Establishing long-term contracts to ensure predictable income.
A solid customer base reassures lenders that the business can meet repayment obligations, enhancing its creditworthiness.
3. Choose the right partner
Not all lenders offer the same terms, so it’s essential to select a financing provider that aligns with your business needs. When evaluating RBF or IBF providers, consider:
- Repayment terms: Look for flexible structures that align with business revenue cycles.
- Fee structures: Understand costs, including interest rates, service fees, and processing charges.
- Lender reputation: Research past client experiences and reviews to ensure reliability.
- Partnering with a reputable financier can improve a business’s financial standing without putting it at risk.
4. Strengthen creditworthiness
Use RBF and IBF strategically to build credit history and financial credibility by:
- Making timely repayments to demonstrate financial discipline.
- Using funds responsibly for growth initiatives like hiring, marketing, or scaling operations.
- Gradually increasing financing limits to show repayment capacity and financial stability.
By leveraging these funding solutions effectively – and making themselves more attractive to potential financing partners – South Africa early-stage businesses and SMEs can build their creditworthiness, unlock more funding opportunities, and set themselves on a path for sustainable long-term success.
Altesh Baijoo
Chief Investment Officer and MD (SA), Flow48
