There are roughly 2.5m small- and medium-sized enterprises (SMEs) in South Africa, according to the latest Finfind study on SME funders and finance seekers. And although the country does not have a shortage of funding channels available, research shows that many small businesses who are eligible for funding are still unable to secure the finance they need.
According to the study, sponsored by the SA SME fund, the credit gap for SMEs in SA is between R86bn and R346bn. The credit gap in sub-Saharan Africa is estimated at between $80bn to $100bn.
The sector provides a “compelling, largely untapped market opportunity” for innovative funders who are able to develop new lending models and risk assessment tools tailored to address the challenges of this complex and burgeoning market.
According to Finfind data, start-up capital, buying equipment, expanding businesses and working capital are the largest funding requests in the country – making up 62.4% of all funding requests.
Over the past few years there has been an increase in alternative funders in emerging markets like SA, but also in more developed markets like the US, UK and Europe. In SA there are 148 funders who provide 328 different finance products.
The biggest differentiator appears to be the split between government and private sector funders whose business models and strategic intents differ, according to the Finfind report.
Co-founders of Fundrr, Idan Jaan and Jarred Noche have first-hand experience of the frustration small businesses have when approaching traditional funding channels such as banks. Jaan has worked in a group which had 80 SMEs in their portfolio, and hardly any of them were able to access bank funding.
“Those that applied for funding would wait 12 weeks for a decision, and they had mountains of bureaucracy to get through,” he says.
Noche says banks use traditional sources of information that aren’t focused on small businesses.
Often, they still require audited financial statements which is quite expensive and very few small businesses have a need for audited statements. The problem of accessing financing also extends to agriculture.
At a recent workshop in Johannesburg, FNB highlighted the plight of small farmers seeking financial assistance. Dawie Maree, head of agriculture information and marketing at FNB South Africa, said offering loans to farmers who do not hold title deeds remains a major risk.
“As the financial sector we need to ensure that everybody gets financing at a reasonable rate that allows them to be profitable. We need to refigure our financial models,” he said.
This includes developing more complex credit structures to have blended finance that helps with access to markets, skills and funding.
Fundrr has developed an automated credit model that analyses close to 100 data points to get a holistic picture of a small business. This includes information about its social media presence, public reviews of the company, response time to clients and how they interact with clients.
They offer unsecured lending and, because of their credit model, the time to complete an application and to upload the required documents generally takes around eight minutes. A decision is made within 24 hours.
They require six months’ bank statements, a lease agreement, trade references and social media handles. They encourage business owners to repay their debt as quickly as they can and do not charge interest for the full term when they do.
They have rejected a fair amount of applications in the 12 months since starting up, mainly because applicants’ cash flow was inadequate, they did not have a strong credit case, and several had existing loans with other funders.
“A lot of our decisions come down to affordability. We want to ensure that the business can afford the repayment and have free cash flow after the repayment to carry on with operations,” says Jaan.
Who is to blame? Kumaran Padayachee, CEO of the independent SME financier Spartan, says business owners should also accept some of the blame for being rejected for financing.
In many instances they don’t do proper research. They don’t understand or know the requirements of alternative lenders, or they do not understand the mandate of the different development finance institutions such as the Small and Enterprise Finance Agency or the IDC.
“They have to be ever-ready because as their business grows, they will require funding during those different stages,” stated Padayachee. He says they should become like a “frequent flyer”.
The frequent flyer is less anxious, has a checklist, a regular routine and is like a well-oiled machine when flying.
“SMEs are more like a casual flyer; when they need funding, they are seldom ready. That is a silly self-inflicted wound to suffer from,” Padayachee said.
They should prepare financial accounts timeously every month and should improve their financial knowledge and understand the alternative funding models.
The use of technology to assist small businesses has potential in SA. However, Padayachee believes the country is lagging behind countries in East Africa, Asia and even Latin America in offering fintech-based funding solutions.
He refers to Chinese company Alibaba, the world’s biggest e-commerce company. Their customers can apply for a loan in three seconds and get approval in one minute. This is mainly because of the information they already have on their platforms.
According to the Finfind study, a number of digital small business lenders, like Lulalend and Merchant Capital, have gained some traction in the local marketplace to help solve access to finance challenges.
Dov Girnun, CEO of Merchant Capital and chair of the South African SME Finance Association (Sasfa), says they offer solutions for retail business owners who have been in operation for a year, have a monthly average of over R30 000 in credit or debit card sales, or monthly electronic funds transfer turnover of R150 000.
The amount provided is agreed on upfront. The company developed technology that integrates into the back-end of a retailer’s point-of-sale terminal and collects a small fixed percentage of each transaction.
“The repayment terms enable the retailer to repay in line with how they trade, collecting more in busier times, and less in their quiet times,” Girnun explains. However, for many, the “busier times” have been few and far between in recent times.