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Include SMEs in lending models

Small businesses in South Africa provide more than 65% of the country’s total employment and contribute over 50% towards the country’s Gross Domestic Product (GDP). However, accessing finance from banks is a particularly difficult process that often doesn’t have a positive outcome. In fact, if you consider that five out of seven SA SMEs fail in their first year of trading, mostly due to cash flow problems; it is clear that improved financial support could empower more SMEs to realise their potential and significantly grow the South African economy.

Yet, South African banks are not challenging the historical lending processed to provide innovative solutions to support SMEs with improved access to finance. They remain locked into process and security driven lending models that systematically exclude many SMEs.  At the core of the issue is the inflexible, heavy weight of banking structure and process; and the impossible distance that these create between the bank and the small business owner as a potential client.

Despite what TV advertisements might creatively portray, the small business owner’s typical experience of applying for bank funding is more like this:

  • The bank’s approach to lending is driven by risk mitigation rather than understanding small businesses, their current circumstances and financial needs.  The lending decision is taken by a distant credit committee, who has assessed historical financial performance, current security and conservative projections. No bank decision-maker has spent any time with you; there has been no face-to-face interaction and no visit to your premises to view the operations and understand the business. As a result, only the few SMEs with perfect credit records and substantial collateral are actually approved and most applications from real world small business owners are declined.
  • The application processes are geared towards bigger business entities and are not at all tailored to the realities of small businesses. To qualify for bank funding means you need to submit a huge amount of paperwork including detailed business plans, cash-flow projections and years of audited financial statements. Much of this is not information that small businesses have to hand, and it will take a considerable investment of time and energy to simply be able to complete the paperwork.  As a result, the application process diverts your attention away from running your business at a time when that’s probably the last thing you can afford.
  • Banks require security from you in exchange for access to funding. If you are similar to many small business owners, you have probably already invested your most significant securities in your business. As a result, you will be ruled out of accessing further funding for general cash flow needs such as working capital.
  • It often takes three to four months for a bank funding application to be processed and the money paid out. Few small business owners can actually wait this length of time. You probably need access to the finance relatively quickly to take advantage of an opportunity or deal with a short-term need. As a result, you are unlikely to be able to access the finance in time to respond nimbly to the changes in your environment.
  • Even if you find yourself within the small percentage who have qualified for bank financing, you will soon come to realise that these lending products are long-term, very structured and they make no allowances for the trading cycles experienced by small businesses. Repayments are fixed, regardless of the normal business cycles such as seasonal times and off-peak periods, which are especially significant for holiday and tourist destinations like Cape Town and Durban. There is no flexibility despite the fact that your business performance cycles are well-known, predictable and can be catered to.

“Out of all business sectors, small business has the biggest challenges in raising funding, with the least resources available to them,” comments Retail Capital’s CEO, David Lewis.

“A lack of available funding has big consequences for small businesses and their survival and growth prospects, particularly when it comes to short term working capital.  A lack of funding support when it is needed will divert management attention away from running the business, prohibit much-needed growth and in some cases, it can cause the small business to fail.”

Retail Capital is an alternative business finance provider that provides accessible working capital for small business owners who accept credit and debit cards as a form of payment. As a market leader determined to transform the small business funding environment, they have already advanced over R350 million to hundreds of businesses including restaurants, retailers, beauty spas and medical practitioners, with more than 70% of satisfied clients returning to gain the further benefits from a re-advance.

Personal service, authentic face-to-face relationships and an understanding of the challenges facing small business owners underpin the Business Cash Advance model, which is characterised by quick and simple applications, fast approval and a high sanction rate.

“Given this sector’s vital contribution to GDP, it is clear that we need to prioritise the development of innovative, flexible and accessible SME finance options in South Africa,” states Lewis. “It is difficult for banks to break away from their traditional, conservative risk mitigation models and as a result, there will be a growth in alternative finance options from non banking sources in a similar manner to that seen in the US, European and Asia-Pacific markets.”

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